“With every passing day I like Barack Obama even more,” remarked an ex-colleague a few days back. In fact, this seems to be the general feeling these days. The recent CNN/ORC poll put Obama’s approval ratings among Americans at 55 per cent. Obama’s rating in 2016 has been at 51 per cent. This has been the highest since his first year as President.

Obama is currently what Americans call a lame duck President. An individual can become the US President only twice. This essentially ensures that any President is typically lame duck during his last few months as President.

So what explains such high approval ratings for Obama, given that there is no way he is going to get a third term? What the economists call the contrast effect is at work. As Barry Schwartz writes in The Paradox of Choice—Why More is Less: “If a person comes right out of a sauna and jumps into a swimming pool, the water in the pool feels really cold, because of the contrast between the water temperature and the temperature in the sauna. Jumping into the same pool after having just come indoors on a sub-zero winter day will produce sensations of warmth.”

And it is this contrast effect which has been driving up the approval ratings of Barack Obama. The elections to elect the next American President are scheduled to happen on November 8, 2016. The two main candidates are Hillary Clinton and Donald Trump. Of course, when people compare Obama to Clinton and Trump, he comes out right on top. This contrast effect has essentially ensured that Obama’s approval ratings have gone up.

In fact, the contrast effect has even led some people to say that Michelle Obama might be the right candidate for President in the years to come. As Myra Gutin professor at Rider University and author of The President’s Partner: The First Lady in the Twentieth Century put it: “Michelle Obama is able to talk to people in a way in which Hillary Clinton can’t.”

While the American first lady has maintained that she has no political ambitions, there is already speculation being made that she might be elected to the American Senate in the years to come. And all this is happening because of the contrast effect that is at work.

In India, closer to home, the prime minister Narendra Modi suddenly starts looking so much better when we compare him to the Congress Party leader Rahul Gandhi.

In fact, the contrast effect is a standard tool used in the marketing of products. A 1992 research paper written by Itamar Simonson and Amos Tversky, shows this through an example of a retailer who was selling a bread making machine. The machine was priced at $275. In the days to come the company also started selling a similar but larger bread making machine priced at $429. The sales of this new machine were very low. But a very interesting thing happened. The sales of the $275 machine more or less doubled.

The $275 bread making machine was expensive on its own. But when compared to another machine at $429, it suddenly started looking like a good deal and the sales went up.

In fact, this is a standard trick used by retailers all over the world to great effect. By displaying two largely similar but differently priced products, the sales of the product with the lower price can be increased significantly by making it look like a bargain.

Retailers often use this trick to promote their own brands by placing their own cheaper products against more expensively priced other brands. Tim Harford points this out in his book The Undercover EconomistIn Dalston, Sainsbury’s [a big retailer] own brand of fresh chilled juice was sitting next to the Tropicana at about half the price.”

The moral of the story is, whether it’s juice or the American President, the contrast effect can really drive up sales.

The column originally appeared in Bangaore Mirror on October 19,2016

Oil and dollar: Why Obama’s love for Taj lost out to Saudi King’s death


Barack and Michelle Obama were supposed to be in Agra on January 27, 2015, visiting the Taj Mahal. Instead they will now be going to Saudi Arabia to pay respects to  King Salman bin Abdulaziz, the recently crowned King of Saudi Arabia and the family of the late King Abdullah bin Abdulaziz, who died on January 23. Bloomberg reports that keeping with religious tradition, Abdullah was was quickly and quietly buried on the day he died.
A newsreport in The Indian Express points out that the “Supreme Court had earlier directed all visitors to the Taj Mahal to disembark at the Shilpgram complex, 500 metres away, and board an electric vehicle to the entry gate.” This was deemed to be a security risk by the Secret Service that guards President Obama and hence, the visit was cancelled.
This reason has since been denied by the White House. A more plausible reason lies in the shared history of Saudi Arabia and the United States. As Adam Smith (George Goodman writing under a pseudonym) writes in Paper Money: “In 1928, the Standard Oil Company of California, Socal, had failed to find oil in Mexico, Ecuador, the Philippines, and Alaska. As a last resort, it bought concession from Gulf on the island of Bahrain, twenty miles off the coast of Saudi Arabia, and found some oil. Socal sought out Harry St. John Philby, a local Ford dealer…who was a friend of the Saudi finance minister, Sheikh Abdullah Sulaiman…For 35,000 gold sovereigns, Socal got the concession for Saudi Arabia. Sheikh Abdullah Sulaiman counted the coins himself. Socal’s Damman Number 7 struck oil at 4,727 feet in 1937.”
This is how Saudi Arabia’s journey as an oil producer started. The United States was the world’s largest producer of oil at that point of time, but its obsession with the automobile had led to a swift decline in its domestic reserves.
President Franklin D. Roosevelt realized that a regular supply of oil was very important for America’s well-being. Immediately after attending the Yalta conference in February 1945, Roosevelt travelled quietly to the USS Quincy, a ship anchored in the Red Sea. Here he met King Ibn Sa’ud of Saudi Arabia, the country which was by then home to the largest oil reserves in the world. Ian Carson and V.V. Vaitheeswaran point this out in their 2007 book, Zoom—The Global Race to Fuel the Car of the Future.
Car production had come to a standstill in the United States during the course of the Second World War. Automobile factories became busy producing planes, tanks, and trucks for the War. Renewed demand was expected to come in after the end of the War. Hence, the country needed to secure another source for an assured supply of oil.
So, in return for access to the Saudi Arabian oil reserves, King Ibn Sa’ud was promised full American military support to the ruling clan of Sa’ud. It is important to remember that the American security guarantee made by President Roosevelt was extended not to the people of Saudi Arabia nor to the government of Saudi Arabia but to the ruling clan of Al Sa’uds.
Over the years, Saudi Arabia further returned the favour by ensuring that Organization of the Petroleum Exporting Countries (OPEC) continued to price oil in terms of dollars despite the fact that it was losing value against other currencies, especially in the 1970s.
Attempts were made by other members of the OPEC to price oil in a basket of currencies, but Saudi Arabia did not agree to it. This ensured that oil continued to be the international reserve and trading currency. Most countries in the world did not produce oil and hence, needed dollars to buy oil. This meant that they had to sell their exports in dollars in order to earn the dollars to buy oil.
If Saudi Arabia and OPEC had decided to abandon the dollar, it would have meant that the demand for the dollar would have come crashing down, as countries would no longer need dollars to pay for oil. Hence, oil will continue to be priced in dollars as long as Al Sa’uds continue to rule Saudi Arabia because they have the security guarantee from the United States.
Further, Saudi Arabia remains a close ally of the United States despite the fact that the late Osama bin Laden was a Saudi by birth. Osama was the son of Mohammed bin Awad bin Laden and his tenth wife, Hamida al-Attas. The senior bin Laden was a construction magnate who was believed to have had close ties with the Saudi Royal family.
Since 2008, a lot of shale oil has been discovered in the United States and the production of oil in the United States has gone up by four million barrels per day to nine millions barrels per day, with almost all of the increase coming from increased production of shale oil. This is only a million barrels per day lower than the daily oil production of Saudi Arabia.
Given this, why does the United States still need to continue humouring Saudi Arabia? It is now producing enough oil on its own. James K. Galbraith has an answer for it in The End of Normal: “There is no doubt that shale is having a strong effect on the American economic picture at present…But the outlook for sustained shale…production over a long time horizon remains uncertain, for a simple reason: the wells have not existed long enough for us to know with confidence how long they will last. We don’t know that they won’t; but also we don’t know that they will. Time will tell, but there is the unpleasant possibility that when it does, the shale gas miracle will end.”
Jeremy Grantham of GMO goes into further detail in a newsletter titled The Beginning of the End of the Fossil Fuel Revolution (From Golden Goose to Cooked Goose: “The first two years of flow are basically all we get in racking…Because fracking reserves basically run off in two years and can be exploited very quickly indeed by the enterprising U.S. industry, such reserves could be viewed as much closer to oil storage reserves than a good, traditional field that flows for 30 to 60 years.” The process used to drill out shale oil is referred to as fracking.
Hence, shale-oil might turn out to be a short-term phenomenon. As of now shale oil is not going to replace cheap traditional oil, which is becoming more and more difficult to find. As Grantham points out: “Last year for example, despite spending nearly $700 billion globally – up from $250 billion in 2005 – the oil industry found just 4½ months’ worth of current oil production levels, a 50-year low!”
It is worth remembering that the United States consumes 25 percent of the world’s daily production of oil and half of its daily production of petrol, or what Americans call gasoline. The fact that it is using way too much oil becomes even more obvious given that it has only five percent of the world’s population. Given this, it still needs Saudi Arabia.
Hence, the Obamas need to go to Saudi Arabia and offer their condolences on King Abdullah’s death as soon as possible. The Taj Mahal will have to wait.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The article originally appeared on www.Firstpost.com as on Jan 26, 2015 

US shutdown no big deal, expect bigger crisis on 17 October

platinum_coinVivek Kaul
 Starting today nearly 800,000 of the 2.1 million people that work directly for the government of the United States of America, have been asked to go on an unpaid leave, leading to non essential services from national parks to museums to libraries being shut down temporarily. The call centres of the Internal Revenue Service(IRS or the equivalent of the income tax department in India) won’t work and nearly 90% of the workers of the Environmental Protection Agency, won’t be at work either. NASA or the National Aeronautics and Space Administration has also more or less been shut down, except its mission control centre at Houston, Texas. Services like rubbish collection and street cleaning stand suspended as well.
Nearly a million workers have been asked to work without pay. This will ensure the continuation of essential services like military, postal service and police. Airport security and air traffic control will also carry on their work as usual.
So what is happening here? The US budget year ends on September 30 every year. A ‘shutdown’ comes into the picture when the American Congress (the equivalent of what we call the Parliament in India) does not pass appropriation bills to fund the ‘discretionary’ spending programmes. The discretionary spending programmes need to be funded every year.
As Matthew Yglesias writes on www.slate.com “Discretionary spending…is money that Congress appropriates on what’s traditionally been an annual cycle. A law is passed saying that such-and-such agency has X amount of money to spend over such-and-such amount of time on this or that.” What is not categorised as discretionary spending is ‘mandatory’ spending. This includes social security, medicare (a form of medical insurance) and some farm subsidies. This spending continues as usual.
The two houses of the American Congress are currently in a logjam. The House of Representatives is dominated by the Republican Party and the Senate is dominated by the Democratic Party. The Republicans want the Affordable Care Act (better known as Obamacare, and an Act which aims to improve the quality of health insurance, at the same time making it more affordable ) to be pushed forward by a period of one year. They have made this a condition for passing a temporary budget to fund the ‘discretionary’ spending of government.
The Democrats on the other hand are in no mood to relent given that the Affordable Care Act is something that President Barack Obama has been closely associated with. Hence, the two political parties have been at loggerheads. As Yglesias writes “When the parties in Congress can’t come together on appropriations bills, they often pass what’s known as a continuing resolution that essentially instructs the government to extend the last appropriations bill forward in time…House Republicans keep writing new continuing resolutions that fund the government while simultaneously delaying or repealing key elements of the Affordable Care Act. Senate Democrats keep taking those provisions out and sending the “clean” continuing resolution back to the House. Absent a continuing resolution, the discretionary portions of the federal government lack funding to continue their work and the government goes into “shutdown.””
With no money coming in the non-essential services are being shutdown. As The New York Times reports “The Office of Management and Budget issued orders that “agencies should now execute plans for an orderly shutdown due to the absence of appropriations” because Congress had failed to act to keep the federal government financed.”
The shutdown will impact the American economy depending on how long it continues. Estimates made Goldman Sachs suggest that a two day shutdown could slowdown the economic growth rate during the period October-December 2013 by 0.1%. A longer shutdown of a week could shave of 0.3% from the economic growth.
Nevertheless, the American government partially shutting down should not be seen as a big worry. The bigger worry is set to come on October 17, later this month. On that day the American government is expected to hit its debt ceiling. The American government spends more than what it earns. In order to make up for the difference it sells bonds and takes on debt. There is a maximum amount of debt that it is allowed to take on, and which currently stands at $16.69 trillion. This limit is likely to be exhausted by October 17, 2013.
If the debt ceiling is not raised the American government will have to stop borrowing and start cutting its expenditure. AsEric Posner writes on Slate.com “If the debt ceiling is not raised, and the executive branch stops borrowing, the government will need to cut spending by about 15 to 20 percent—or almost 40 percent of spending on everything (yes, Medicare and defense) other than the interest on the debt.”
The impact of the cut in expenditure will be immediate. As Henry J Aaron writes in The New York Times “A decision to cut spending enough to avoid borrowing would instantaneously slash outlays by approximately $600 billion a year. Cutting payments to veterans, Social Security benefits and interest on the national debt by half would just about do the job. But such cuts would not only illegally betray promises to veterans, the elderly and disabled and bondholders.”
Also, the American government has reached a stage where it pays the interest on past debt by selling new bonds and taking on more debt. Any decision to stop paying interest on bonds will lead to a global financial crisis. As Posner writes “ If he(i.e Obama) stops interest payments, the United States will default. This will not only raise interest payments—costing taxpayers hundreds of billions of dollars—but could spark a financial panic like the meltdown of 2008.”
If this situation arises, there is not much that President Obama will be able to do. He will basically have three options. “One is President Obama could decide that the government’s legal obligation to spend (and certain elements of the 14thAmendment) trump the statutory debt ceiling, and just order the Treasury to sell more bonds. The second option is Obama could instruct the Treasury to pay some of the government’s bills and just not pay the rest. The third option is to pay nobody. All three of these options face the same basic problem of seeming to be illegal. (The second one also faces the problem that Treasury says it lacks the logistical capacity to do it),” writes Yglesias.
Also, there are no legal provisions to decide which expenditure should be cut first. “There is no clear legal basis for deciding what programs to cut. Defense contractors, or Medicare payments to doctors? Education grants, or the F.B.I.? Endless litigation would follow. No matter how the cuts might be distributed, they would, if sustained for more than a very brief period, kill the economic recovery and cause unemployment to return quickly to double digits,” Aaron points out.
Given this, the Republicans and the Democrats need to start talking pretty soon, or we will have another crisis on our hands pretty soon.
The article originally appeared on www.firstpost.com on October 1, 2013

 (Vivek Kaul is a writer. He tweets @kaul_vivek)

Why the markets are reading too much into Larry Summers' withdrawal from Fed race

larry summers Vivek Kaul 
Larry Summers withdrew from the race to become the next Chairman of the Federal Reserve of United States on September 15, 2013. He was believed to be American President Barack Obama’s favourite candidate. (To read why he withdrew from the race click here)
The markets around the world immediately cheered his withdrawal. This happened primarily because Summers was widely seen to be what in central bank speak is termed as a ‘hawk’. A hawk is someone who is likely to raise interest rates and cut down on money supply.
Summers had said in April this year that “QE in my view is less efficacious for the real economy than most people suppose.” QE stands for quantitative easing and refers to the money that the Federal Reserve of United States, the American central bank, has been printing and pumping into the financial system, in the hope of getting the American economy up and running again.
The idea here is that by flooding the financial system with money, the interest rates will continue to remain low, thus encouraging people to borrow and spend more. With people spending more money, businesses will perform better, and the economic growth would come back.
Summers, it is believed, thinks that the government directly spending money through 
stimulus programmes, would have a greater impact on the economic growth in comparison to the Federal Reserve maintaining low interest rates by printing money and hoping that people borrow and spend more money.
The markets believed that Summers would stop printing money faster than Janet Yellen, the current Vice-Chairwoman of the Federal Reserve, who is now the front runner for the top job at the Federal Reserve.
Currently, the Federal Reserve prints $85 billion every month, which it pumps into the financial system by buying bonds. Ben Bernanke, the current Chairman of the Federal Reserve of United States, has indicated over the last few months that the Federal Reserve will go slow on money printing in the days to come.
This is a big worry for the markets. The idea behind all the money that is being printed has been that at low interest rates people will borrow and spend more money, and thus economic growth will return. But more than that what has happened is that investors have borrowed money available at very low interest rates and invested it in financial and other markets around the world.
This has led to big bubbles in these markets. 
As economist Bill Bonner writes “Works of art are selling for astronomical prices. High-end palaces and antique cars are setting new records. Is this reckless money hitting the stock market too?” Easy money is showing up in all kinds of places.
If the Federal Reserve goes slow on money printing, interest rates are likely to spike, making it difficult for investors who have enjoyed the benefits of the ‘dollar carry trade’ to continue enjoying it. Summers, the markets had come to believe, was more likely to stop money printing faster than any other candidate. And now that he is out of the race, the era of ‘easy money’ policies is likely to continue for a slightly longer period.
The situation needs a slightly more nuanced reading than this. 
As Martin Fridson writes on Forbes.com “The main, rather thin basis for portraying Summers as a hawk was a single remark he made in April about the Fed’s quantitative easing (QE) program: “QE in my view is less efficacious for the real economy than most people suppose.” This was not a major, formal policy statement, but a comment within an official summary of Summers’ remarks at a conference.”
the Federal Reserve’s own research has showed as much. More than that even if a economist believes that quantitative easing hasn’t been effective, that doesn’t mean that he also believes that the Federal Reserve should go slow on it.
As Nobel Prize winning economist Paul Krugman 
writes in a recent column in the New York Times “One answer is the belief that these purchases…are, in the end, not very effective. There’s a fair bit of evidence in support of that belief.” The Federal Reserve puts the money that it prints into the financial system by buying bonds.
Even though, Krugman believes that quantitative easing hasn’t been very effective, he still recommends that it is important to continue with it. “Time for the Fed to take its foot off the gas pedal?” asks Krugman and then goes onto explain why that would not be the right thing to do.
He feels that any suggestion of the Federal Reserve going slow on money printing is going to lead to the long term interest rates in the United States going up. And this can’t be good for the overall American economy, which has just started to show some signs of revival.
Hence, the point here is that even though economists may understand that money printing has not been very effective, at the same time they may not want to go slow on it.
Summers also thinks that government stimulus programmes are likely to be more effective, there was not much that he could do about it. Any extra spending by the American government would mean it would have to borrow more money. This would be a problem given that the government has almost touched its debt limit of $16.7 trillion. 
As the Reuters reports “The government has been scraping up against its $16.7 trillion debt limit since May but has avoided defaulting on any bills by employing emergency measures to manage its cash, such as suspending investments in pension funds for federal workers.”
And more than that the Republicans don’t seem to be in any mood to let the government increase its spending. As an Associated Press news report points out “What’s more, massive fiscal stimulus is highly unlikely given opposition from congressional Republicans to increased spending.”
Given these reasons it is highly unlikely that Larry Summers would have been able to do anything dramatically different from what the Bernanke led Federal Reserve is currently doing or from what the Yellen led Federal Reserve(which is how it seems like right now) might do in the days to come. As Fridson writes on Forbes.com “My point is rather that the range of policy options will be limited for whoever steps into Ben Bernanke’s shoes. 
Barack Obama was never going to nominate a Fed chairman who would diverge from the narrow list of realistic choices regarding interest rates.”
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

The $1 trillion coin: Krugman’s loony idea to save US

platinum_coinVivek Kaul
When the going gets tough, the ideas get absurd and bizarre. No one said that. I just happened to ‘coin’ it after coming across one of the craziest things I have heard in recent times. It all about ‘coining’ a trillion dollar platinum coin that could ‘supposedly’ solve one of the biggest financial problems of our times. But before we get to that some background information is required here.
The American government cannot print money
The budget deficit of the American government has been greater than trillion dollars for the last four years. Budget deficit is the difference between what a government earns and what it spends.
In order to finance this deficit the American treasury department (or what we call the ministry of finance in India) borrows money. But there is only so much money going around to be borrowed. And with trillion dollar deficits borrowing beyond a point is not possible.
So what does the government do? Common sense tells us that it can print dollars and finance the deficit. But the American government is not allowed to print money. Instead it borrows from the Federal Reserve of the United States (the American Central bank or what we call the Reserve Bank of India).
Now where does the Federal Reserve get money to lend to the government? It simply prints it. The Federal Reserve as the central bank is allowed to print money. As John Truman Wolfe author of Crisis by Design: The Untold Story of the Global Financial Coup puts it “How bizarre is it that instead of simply printing the money themselves, governments “chose” to borrow it from their respective central bank. The US is currently $16 trillion in debt – and the debt is growing at the rate of $49,000 a second! Last year’s interest on the debt here was $454,000,000,000 – Why borrow money from the Fed (who simply creates it out of thin air by making a book entry and clicking a mouse ) when the government could simply print its own without borrowing it and paying interest on it.”
The debt ceiling
There is a ceiling to how much the American government can borrow and it is $16.4trillion. This was breached on December 31, 2012. After this the treasury secretary Timothy Geithner put in place some “extraordinary measures” that will give a headroom of round $200 billion and help the American government avoid a default on its maturing debt as well as continue meeting its various expenditures. The American government has reached a stage where it has to take on more debt to pay off previous debt. But with the debt ceiling being hit more debt cannot be taken on. The American politicians have been unable to find a solution to this till date.
The loophole
The US Code Section 5112 states this:
“The (Treasury) Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.”
The above section basically allows the American Treasury Secretary to mint absolutely any kind of platinum coin. When it comes to gold and silver coins, he is not allowed such a leeway. The Code prescribes the exact dimensions as well as weights of gold and silver coins that can be minted. In case of platinum coins no such prescriptions are made.
So what is the idea?
This loophole allows the Treasury Secretary of the United States to get the US Mint to mint a platinum coin and deem it be worth $1trillion (or any big amount for that matter). The amount of platinum in the coin doesn’t really matter. It could be one gram or one troy ounce (28.31 grams). Hence the face value of the coin (i.e. $1trillion) would have no link with the amount of platinum in it.
Having minted such a platinum coin, the Treasury Secretary can then use the coin to repay the money that it has borrowed from the Federal Reserve. The Federal Reserve would have to accept the coin simply because any creditor cannot refuse what is legally deemed to be money, when it comes to the settlement of a debt. And the $1trillion coin would be a legal tender.
Once the $1 trillion coin is presented to the Federal Reserve, the total debt outstanding of the American government would come down below the debt ceiling of $16.4trillion. As on January 2, 2013, the American government had borrowed around $1.67trillion from the Federal Reserve. And that way the American government could continue to borrow more.
The Krugman push
The Nobel prize winning economist Paul Krugman gave a push to the idea by recommending it on his blog a couple of days back. Krugman feels that even though the idea is silly it makes sense simply because the US Congress has the right to approve the spending bills but then it won’t let the President to borrow money required to implement those bills.
As Krugman wrote “we have the weird and destructive institution of the debt ceiling; this lets Congress approve tax and spending bills that imply a large budget deficit — tax and spending bills the president is legally required to implement — and then lets Congress refuse to grant the president authority to borrow, preventing him from carrying out his legal duties and provoking a possibly catastrophic default.”
There are others who do not buy the idea at all. As Kevin Drum, a famous blogger, wrote recently “Is this really the road liberals want to go down? Do we really want to be on record endorsing the idea that if a president doesn’t get his way, he should simply twist the law like a pretzel and essentially do what he wants by fiat?”
The big danger in this case is that if something like this were to be implemented, the American government can easily keep getting the Federal Reserve of United States to keep printing money and keep repaying that money through issuing one trillion dollar platinum coins. That cannot be a good idea after all. A government which has the power to print unlimited amount of money, even though indirectly, is not something that world wants, specially given that the dollar continues to be the international reserve currency.
To conclude, it is ‘absurd’ ideas like these that make me remain bullish on gold despite the recent attempts to discredit the yellow metal as being useless.

The article originally appeared on www.firstpost.com on January 9, 2013
(Vivek Kaul is a writer. He can be reached at [email protected])