Thought for the day
"I am sometimes a fox and sometimes a
lion. The whole secret of government lies in knowing when to be the one or the
other. "
-
Napoleon Bonaparte (French, 1769-1821)
Word for the day
Nonage (n)
A period of youth or immaturity.
(Source:
Dictionary.com)
Teaser for the day
Lehman Bros. was crucified in the
financial collapse of 2008!
Who will it be in the commodities'
collapse of 2015?
Cart leading the horse
The elementary principle of economics is that the price of a
thing that has any economic value is determined by the forces of demand and
supply. Often in the short term a state of inequilibrium does exist leading to
volatility in prices. However, the equilibrium is usually restored by operation
of a variety of factors.
There is no denial that economics is youngest amongst the
scientific discipline and pure scientist hesitate in admitting it as a
discipline of science. Nonetheless it is evolving fast and becoming popular.
Not getting into this academic debate, what I have understood is
that in popular economics theory:
(a) Price of currency
is usually a function of demand and supply of that currency at any given point
in time. Higher supply should normally leads to lower exchange value and vice
versa. The demand of the currency is determined by the relative real rate
of return (interest) and level of economic in the parent jurisdiction.
(b) Price for a
particular commodity is determined by the demand and supply conditions of that
commodity at any given point in time. The demand of commodities fluctuates as
per the level of economic activity in the consuming jurisdiction, export demand
and outlook for the foreseeable future. The supply of commodities may fluctuate
due to a variety of reason - local to the producing jurisdiction as well
global.
(c) Interest rates
are usually function of demand and supply of the money in the monetary system.
Demand for money is again impacted by the level of economic activity and
outlook in foreseeable future. Whereas supply of money is mostly a function of
risk perception and relative return.
The traits of human behavior like "greed",
"fear", "complacence", "renunciation", and
"aspirations" have all been accounted as the balancing factors for
demand and supply and not considered as determinates of price as such. This in
my view is the cause of most problems facing global economy in the present
times.
Consequently, the business of forecasting has become extremely
difficult and fraught with risk.
In past two months I have seen hundreds of reports forecasting
price of commodities, most notably crude oil; currencies, most notably USD and
JPY; interest rates, most notably US policy rates.
Most of these forecast appear mere extrapolation of the current
price trend and hence do not inspire any confidence.
In Indian context, exchange value of INR, 10yr benchmark yield
and crude oil prices evoke much interest. Interestingly most economic growth
forecasts appear predicated on these, whereas logically it should be the other
way round.
...to continue tomorrow
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