Thought for the day
“Inferiors revolt in order that they may be equal, and equals that
they may be superior. Such is the state of mind which creates revolutions.”
-
Aristotle
(Greek, 384-322BC)
Word for the day
Sparge (v)
To scatter or sprinkle.
(Source: Dictionary.com)
Teaser for the day
Post Delhi election last winter, RaGa said Congress needs
to learn lot from AAP.
It indeed does need to learn what not to do?
Few words of caution
Investor’s confidence has definitely taken a rocket flight in
past two weeks. People who were not even willing to talk about investing in
Indian equities are now desperate to listen to “multi bagger” ideas. Analysts
and strategists like me have also changed their tune. While this is a welcome
change from the extreme pessimism seen during past three years, I feel some
words of caution would be useful.
Reproduced below is an interesting discourse from Unlearning
Economics, I find extremely relevant to the current circumstances.
First, something which is expected to do a certain job - whether
it's an economic system or the economists who study it - is expected to do this
job all the time. If an engineer designs a bridge, you don't expect it
to stand up most of the time. If your partner promises to be faithful,
you don't expect them to do so most of the time. If your stock broker
promises to make money but loses it after an asset bubble bursts, you
won't be comforted by the fact that they were making money before the bubble
burst. And if an economic system, or set of policies, promise to deliver
stability, employment and growth, then the fact that it fails to do so
every 7 years means that it is not achieving its stated objectives. In
other words, the "invisible hand" cannot be acquitted of the charge
of failing to do its job by arguing it only fails to do its job every so often.
Second, the argument implies there was no causal link between
the boom and the bust, so the stable period can be understood as separate from
the unstable period. Yet if the boom and the bust are caused by the same
process, then understanding one entails understanding the other. In this case,
the same webs of credit which fuelled the boom created enormous
problems once the bubble burst and people found their incomes scarce relative
to their accumulated debts. Models which failed to spot this process in its
first phase inevitably missed (and misdiagnosed) the second phase. As
above, the job of macroeconomic models is to understand the economy, which
entails understanding it at all times, not just when nothing is going wrong -
which is when we need them least.
As a final note, I can't help but wonder if this argument, even
in its general political form, has roots in economic theory. Economic models
(such as the Solow Growth Model) often treat the boom as the 'underlying'
trend, buffeted only by exogenous shocks or slowed/stopped by frictions. A
lot of the major macroeconomic frameworks (such as Infinite Horizons or
Overlapping Generations models) have two main possibilities: a steady-state
equilibrium path, or complete breakdown. In other words, either things are
going well or they aren't - and if they aren't, it's usually because of an
easily identifiable mechanism, one which constitutes a "notably rare
exception" to the underlying mechanics of the model. Such a mentality
implies problems, including recessions, are not of major analytical interest,
or are at least easily diagnosed and remedied by a well-targeted policy.
Subsequently, those versed in economic theory may have trouble envisaging a
more complex process, whereby a seemingly tranquil period can contain the seeds
of its own demise. This causes a mental separation of the boom and the bust
periods, resulting in a failure to deal with either.”
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