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Indian Firms Risk Dollar Debt Default as Rupee Slides

Posted by WARREN MOSLER on November 30th, 2011

Another region with a private sector dollar short to worry about.

Seems the world is short dollars and euro?

Indian Firms Risk Dollar Debt Default as Rupee Slides

By James Fontanella-Khan

November 29 (FT) — Dozens of Indian companies are coming under financial stress after the sharp fall of the rupee against the dollar during the past few months made once-cheap loans in the US currency much more expensive, analysts have warned.

Indian companies face an overall short-term foreign debt maturity of $16bn for the year ending in March 2012 – according to Crisil, the Indian subsidiary of the US credit rating agency Standard & Poor’s – the majority of which is US dollar-denominated.

The most common forms of the debt are foreign currency convertible bonds, which can either be converted into a lucrative stake in the issuer on maturity, which is attractive if the issuer’s shares rise, or simply repaid in full.

Many Indian companies resorted to the FCCBs as a convenient way to raise cheap debt when the country’s stock markets were gripped by exuberance between 2005 and 2008, with the main Sensex index peaking in November last year at more than 21,000 points.

24 Responses to “Indian Firms Risk Dollar Debt Default as Rupee Slides”

  1. Shaun Hingston Says:

    Another MMT mind bug.

    Why do most MMTers dismiss the notion of ‘means of exchange’? The MMT line is that money is a creature of the state. I think that this is inadequate.

    What about gold? What about time-sharing systems existing within a normal economy? I think that “means of economic information exchange” should be the correct term. All ‘money things’ fall into the superset defined by ‘economic information exchange’.

    Means of Economic Information Exchange

    What is it? Any token-system that facilitates the flow of economic information, and can be used to make economic decisions(i.e transactions).

    What is a token-system? From an MMT perspective it is defined by everything that is involved in the flow of tokens between economic participants. So that would mean Consolidated Govt. Sector, markets and the ‘money supply’. If we are talking about gold, then it really only means the physical gold, markets, and the ‘natural sources’ of gold.

    What makes one token-system better than another?
    This is defined by its ability to transfer economic information between participants. This is in both quality & quantity.

    Why is state money better than gold?
    Generally speaking, it is easier to transfer economic information, it can be manipulated in such a way that maintains reasonably stable prices, prices in a state money system are more indicative of participants wants and desires than those participating in a gold system.

    Right, so your saying that it all comes down to a token-system’s ability to transfer economic information. Why don’t people start up their own currencies?
    Token systems transmit the wants and desires of individuals to each other. The overall strength of a token-system is determined by its ability to statisfy wants and desires against the external world. There are individuals within each token system that can manipulate prices greater than others. They may have this power legitimately or not. If adversaries are able to influence the system enough, then they can distort prices enough to obtain more of what they desire. If another token-system is created, then it will most likely threaten this position of privilege. Therefore adversaries will respond in such a way to manipulate prices so that the new currency is threatened. This is generally the reason why new currencies have a difficult time establishing themselves.

    Why do you think this is more consistent with empirical observations?
    According to the MMT definition of State Money, then a lot of items currently being used to facilitate economic information exchange would be excluded, for no reason. For example, there are time-banks being used in parts of the world, but they are not subject to taxation, or spent into existence like MMT defined currency, so what are they? But what they do facilitate is the exchange of needs & desires between individuals.

    What do you define as the optimum?
    The ultimate economic output that can be possibly achieved will occur when a token-system most accurately reflects the wants and desires of economic participants…. This would be the hypothetical situation of when everyone can simultaneously communicate with each other, everywhere. It is meant to indicate what is the ‘optimum state’, not what is actually meant to happen, but what possible token-systems should be measured against.

    Reply

    Neil Wilson Reply:

    @Shaun Hingston,

    That’s why MMT rarely uses the word ‘money’. Its generally concerned with nominal liabilities.

    I believe Randy Wray wrote an excellent piece on ‘money things’ here:

    http://www.levyinstitute.org/pubs/wp_656.pdf

    Reply

    Shaun Hingston Reply:

    @Neil Wilson,

    Hmmm good read. MMT should use the word money and redefine it. Nonetheless, there is still no foundation in economic thought that strives to define what is and is not money. I think that what is presented reconciles most definitions of money.

    Reply

  2. roger erickson Says:

    “Why is state money better than gold?”

    Because the highest return is always the return-on-coordination. Scaling up ability to explore large-group options requires scalable large-group agility and scalable large-group intelligence & coherent alignment to emerging options. Same reasons no species or armies are resource constrained. The bigger constraint is always organizational ability.

    That means that only state-money denominations are agile enough to keep up with the kinetic demands of uncontrollable public initiative. Commodity-money was thoroughly tested, and was found inadequate. It’s valuation has to be constantly re-scaled, simply because populations & their options scale faster than the magnitude of any commodity store. If that’s the case, just simplify and cut the commodity out of the re-scaling loop that links organizational ability to group outcomes.

    Reply

    Shaun Hingston Reply:

    @roger erickson,

    Precisely!

    Reply

    Dan Furlano Reply:

    @roger erickson,

    Roger,

    Is this discussed in a larger paper? Great stuff.

    Reply

    roger erickson Reply:

    @Dan Furlano, No. Not sure it’s necessary. It’s simply a first pass translation of some very old & simplistic biology, physics & general systems axioms … into economics jargon.

    If more is necessary, perhaps you’d like to help me write an appropriate blog entry, linking to all the relevant references and – more importantly – translating some of the general language to specific economics-ese.

    Write to me at OperationsInstitute dot com rge at

    Reply

    beowulf Reply:

    @roger erickson,
    “It’s simply a first pass translation of some very old & simplistic biology, physics & general systems axioms … into economics jargon.”

    Sounds like cybernetics.
    Through Project Cybersyn, Beer hoped to implant an electronic “nervous system” into Chilean society. The country would be linked together via a vast communications network to create what the Guardian calls a “socialist Internet.” (and yeah, my inner Hayek has a problem with that). :o)
    http://situationroom.hackitectura.net/?p=126

    roger erickson Reply:

    @Beowulf, Cybernetics is a subset of General Systems Theory. To be an organized system, there have to be adequate interconnectivity patterns, and adequately selective interaction bandwidths, and adequate instrumentation to support determination & convergence to what’s “adequate.”

    What’s adequate? Optimal scalability, which eventually supercedes any primitive political notions or ideology.

    I like the USMC’s summary – which their Majors state but their Generals never live up to. “Success depends on the quality of distributed decision-making.”

    What defines “quality”? Ultimately, we’re back to Optimal scalability, which is unpredictable & has to be selected by exploring options ex post, and maps fairly directly to distributed Aggregate Demand [DAG, not just AG].

    ps: why do economists insist on using such arcane terms like ex ante & ex post? Seems not just unnecessary, but distinctly unproductive, precisely because it inhibits the very coordination that would improve the quality of distributed decision-making!

    roger erickson Reply:

    @Dan Furlano, see

    http://www.benzinga.com/general/10/09/457022/risk-management-from-markets-to-market-amoebas-and-back-to-mmt

    Reply

    Dan Furlano Reply:

    @roger erickson,

    For some unknown reason the background on the web site is dark blue and difficult, if not impossible, to read. I tried both Firefox and IE. Sent you a screen shot.

    Dan

    kkken530 Reply:

    @roger erickson, I have the same result as Dan,then it clears up 4 paragraphs and 2-3 separate sentences down. the first clear paragraph starts with “What entity in cells manages adenosine production?”

    Art Reply:

    @roger erickson,

    “Commodity-money was thoroughly tested, and was found inadequate. It’s valuation has to be constantly re-scaled, simply because populations & their options scale faster than the magnitude of any commodity store.”

    One of the few times I’ve heard someone else say it so explicitly (and more technically from the Biology side). For a commodity standard to work, the nominal target has to be adjusted when necessary. The most market-oriented approach would be periodic referenda on an appropriate price (would work for CBs’ lending targets too, I think; this is from my way-out-of-paradigm days, but still relevant: http://symmetrycapital.net/index.php/blog/2006/12/committees-vs-markets/). But agree with you that an inconvertible currency is far more efficient, given sturdy enough institutions and economies.

    There’s a footnote in Frank Knight’s Risk, Profit & Uncertainty that echoes your point (he wrote that gold had worked b/c its production had kept pace w/ real capital accumulation over long periods). And if I remember correctly, in Robert Mundell’s Nobel speech, he mentions the handful of economists (Mises, Rist, Cassell, 2 others?) who predicted a depression from the Fed and BOF making a concerted push back to gold at its severely mispriced 1914 parity (Cassell’s book The Crisis in the World’s Monetary System is a short, interesting read if you can find it; and/or http://www.dartmouth.edu/~dirwin/Cassel.pdf). All out of modern paradigm (squarely in paradigm in the late 20s), but still relevant.

    Reply

  3. Shaun Hingston Says:

    Time for a new kind of money

    Since I have ‘joined’ the MMT community, I have watched as MMT has discussed headlines and challenged the contempory economic thought. But one thing has frustrated me, the lack of creativity. As the world plunges into chaos I am surprised by the lack of creative solutions offered by the MMT community. This to me is an opportune time for MMT to show the world an alternative to the current arrangement.

    As stated earlier I have argued that token-system is best able to transfer the needs and desires of participants will prevail. This in itself is something that can be offered to the OWS protestors.

    I suggest that MMTers work towards a new token-system that can be offered to OWS protestors as a way for them to exchange their needs and desires. Ultimately I think that this system will either force the current system to reform itself to survive or will become inferior.

    What is needed?

    – A system to transmit tokens.
    – A system that manages the creation of tokens.
    – A system that facilitates the exchange of prices.
    – A system that measures the needs & wants of individuals.

    Why will it work?

    Because it will transmit needs & wants better than the current system. There are many different strategies to gain acceptance. A pool of donations could be used to support an exchange rate for the token-system. This will give the token system some underlying support while it gains acceptance. A job guarantee like system could be used initially to disburse initial funds into the economy. This could be used to coordinate the efforts of OWS. Sooner or later businesses will start to see the participants of the OWS as a labour force. They will then start to purchase tokens, which will create a pseudo-permanent state of support for the currency.

    At this point, it is likely that the supply of tokens will need to be inflated. This situation is good for everyone. People participating within the OWS will start to gain jobs, the current lack of expansion in money supply of U.S.D would be somewhat offset by the expansion of the OWS token-system.

    The token-system will then most likely start to become threatened by those with a vested interest of the U.S.D. The will need to increase spending in order to support their attack on the token-system or to encourage businesses to use U.S.D. Either way even if the token-system is defeated, unemployment will be fixed. There will be a population of individuals educated in MMT, and this group will act as an inoculation against any attempts by powerful morons to drive up unemployment.

    Consequently it will be imperative that legislation be changed to allow, groups within the U.S.A to create their own free-floating currencies.

    Immediate Suggestions

    -Warren, Mike, Bill, and anyone else, should immediately issue 10,000 tokens and disburse them into the OWS movement. At the same time, they should offer at some cost to be paided in those credits, the opportunity for OWS to post on their blogs.

    -Then, the Job Guarantee could be formed by paying those OWS participants that promote verifiable material that promotes the MMT agenda.

    -After a series of donations have been collected, this could be used to fund a lottery/payment of which tickets can only be purchased using the OWS credits.

    Reply

    Tristan Lanfrey Reply:

    @Shaun Hingston,

    I’m not sure I understand your point. The USD is already a working token system, isn’t it? It’s just that the issuer of these USD tokens seems to have forgotten how to do its job properly.

    Also, why would anyone want to use your new tokens in the first place?

    Unless there are desirable real goods or services available for purchase in these new tokens only, without an imposed (and enforced) liability denominated in tokens, nobody will be compelled to use them.

    I fail to see what the OWS crowd could offer that is not already available for sale in USD. And the OWS crowd cannot impose nor enforce any kind of liability onto others either.

    And on top of that, they would still have the need to get hold of USD to pay for their own liabilities denominated in USD (good luck convincing the IRS to accept payments in new tokens…)

    As an aside, in the same vein of alternative token systems, the UMKC’s buckaroos are a much better experiment because some sort of liability is imposed and enforced.

    Reply

    Shaun Hingston Reply:

    Sorry got to bold this next part.

    By definition prices are suppose to represent the needs & desires of the community. When prices are optimal, that is they are a true and complete representation of wants & needs, THEN resources will be perfectly allocated. This results in maximal production of said economy.

    I think that nearly ties everything together.

    @Tristan Lanfrey

    The USD is already a working token system, isn’t it? It’s just that the issuer of these USD tokens seems to have forgotten how to do its job properly.

    No, according to the principles I have asserted, the USD token system could function better.

    Unless there are desirable real goods or services available for purchase in these new tokens only, without an imposed (and enforced) liability denominated in tokens, nobody will be compelled to use them.

    Any new token system will always incur an initial cost. Economic agents need to justify the expenditure of energy on calculating future prospects according to the prices offered by the alternative token system. As initially mentioned, I have offered ideas that could bootstrap the system.

    Also as mentioned and observed elsewhere people do not have to be compelled to use a token system.

    The token system if constructed and managed properly will allocate the resources participating in this economy more efficiently than the U.S.D system.


    I fail to see what the OWS crowd could offer that is not already available for sale in USD. And the OWS crowd cannot impose nor enforce any kind of liability onto others either.

    Their labour and consumption.


    As an aside, in the same vein of alternative token systems, the UMKC’s buckaroos are a much better experiment because some sort of liability is imposed and enforced.

    Yes agree, the characteristics of the buckaroo certainly make it easier for economic agents to justify the energy expenditure in participating. However the conditions exist for the OWS currency to work, since there is excess capacity that could be used for production and consumption.

    Reply

    Tristan Lanfrey Reply:

    @Shaun Hingston,

    No, according to the principles I have asserted, the USD token system could function better.

    Could you elaborate please? I really don’t see how the USD is not a token.

    As for their labour, if the OWS crowd is not any better nor cheaper than the people who will accept to work in exchange of USD, why would I hire someone who wants tokens that I don’t have?

    And if they want to buy stuff in new token but I don’t care for these tokens because I have no liability in such tokens, and because all the goods and services I desire are available for purchase in USD, why would I accept these tokens in exchange of my goods and services?

    And again these pioneers of the new token, will more likely be busy selling their labour in exchange of USD because they already have to extinguish liabilities in USD (otherwise, the government sends them to jail).

    Any new token system will always incur an initial cost. Economic agents need to justify the expenditure of energy on calculating future prospects according to the prices offered by the alternative token system. As initially mentioned, I have offered ideas that could bootstrap the system.

    A lot of fancy words. Is it to say that I’d need to be willing to work for tokens that I can barely use, hoping that later on the new token system will not endup being corrupted and scrounged by greedy bankers, so I can pay a fair price for goods and services? Doesn’t that require a lot of faith?

    And, ultimately, even if you have a decent group of users of the new token, this system as a whole will still need to obtain USD in order to extinguish their USD liabilities (pay their taxes). So as a group, they’d still be victim of the price distorsions you wanted to fight in the first place. Or am I missing something?

    I’m trying to be pragmatic here, and I don’t see why I would use such new tokens while I’m coerced into using the “old” tokens anyway. That’s one of the reasons why I don’t use bitcoins and other similar things (and probably why these things will never take over any official currency system).

    Shaun Hingston Reply:

    @Tristan

    Could you elaborate please? I really don’t see how the USD is not a token.

    I guess we disagree over the definition of ‘working’. Simply to say that the problem is ‘just’ the issuer is IMO a massive understatement.


    As for their labour, if the OWS crowd is not any better nor cheaper than the people who will accept to work in exchange of USD, why would I hire someone who wants tokens that I don’t have?

    Pursue export growth strategies until the currency is established. Then move towards domestic growth strategies. This will need to be delicately managed so that value of labor participants within the OWS token system is not overly devalued.

    This basically sets everything up needed for it to become sustainable. U.S.D businesses looking for cheaper labour will start to exchange U.S.D for OWS tokens. Once this occurs consumption with OWS tokens becomes less of an issue.

    A lot of fancy words. Is it to say that I’d need to be willing to work for tokens that I can barely use, hoping that later on the new token system will not endup being corrupted and scrounged by greedy bankers, so I can pay a fair price for goods and services? Doesn’t that require a lot of faith?

    Although I wouldn’t describe it in exactly the same way, yes. But faith needs is based on something. That ‘something’ needs to be influenced. Initially that ‘something’ will be the boot-strapping or similar ideas, then its no longer faith, right? Then there will need to be structural changes so that common infrastructure can be supported. As long as those structural changes lead to better quality prices than the U.S.D system, then the system will not have an issue in terms of performance. However, it may be challenged by adversaries that exist within the U.S.D system. Meaning they will distort the U.S.D price structure to threaten the OWS token system.


    …this system as a whole will still need to obtain USD in order to extinguish their USD liabilities (pay their taxes) So as a group, they’d still be victim of the price distorsions you wanted to fight in the first place. Or am I missing something?

    This will depend on the proportion of economic exchanges that occur according to the U.S.D price structure. With each transaction is an associated loss due to unnecessary loss, for whatever reason. The summation of unnecessary loss across all transactions indicates the total unnecessary loss for a time period. Therefore, the precise answer to your question will depend on the number of transactions that occur in each respective economy for an economic agent.

    Ultimately it will depend on the ability of adversarial agents to distort the OWS price structure such that they are able to derive at-least the same benefit they obtain in the U.S.D token system.

    Given this, the participants must protect against such distortions and still maintain efficient prices.

    WARREN MOSLER Reply:

    :)

    Reply

    beowulf Reply:

    @Tristan Lanfrey,
    “And on top of that, they would still have the need to get hold of USD to pay for their own liabilities denominated in USD (good luck convincing the IRS to accept payments in new tokens…)”

    Exactly, that’s been the undoing of many a barter (or alternative currency) system.
    Earning trade or barter dollars through a barter exchange is considered taxable income, just as if your product or service was sold for cash.
    http://www.irs.gov/businesses/small/article/0,,id=113437,00.html

    Reply

    Robert Kelly Reply:

    @Shaun Hingston,
    Lack of creativity is not the issue. It is still lack of credibility. MMT is still not “believed” by the vast powers that be. Creativity comes into play when trying to get others to understand how modern “money” works. That’s the frustrating part. Kudos to Warren et al for continuing on as they must feel they are “talking to a wall”.

    Reply

    WARREN MOSLER Reply:

    We already have that system.

    Have you read the 7dif, mandatory readings, and proposals on this website?

    Reply

    jason m Reply:

    @Shaun Hingston,
    thanks for your ideas. Whether they fly or not, it’s helpful for future discussions.

    Reply

  4. John O'Connell Says:

    Without knowing anything about Indian firms’ problems other than what is presented here, it seems to me their problem is not a shortage of dollars but a surfeit of rupees. They were doing fine when their economy was in a “bubble” stage. The dollar has continued to depreciate against the basket of other currencies after 2008, which would seem to indicate a world oversupply of dollars already. It looks to me like the Rupee is just depreciating even faster.

    How is the US government responsible for bubbles in India and rupees?

    Reply

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