Jas Business Blog

A day back I was going through the blog of Greg Mankiw, an economics professor at Harvard University. His yesterday’s post talks about two articles he read giving him two hypothesis:

What he derives out of these two hypothesis is a a new piece of the monetary transmission mechanism: The Fed’s monetary expansion reduces interest rates >> low interest rates drive up commodity prices >> high commodity prices make OPEC rich >> and finally OPEC uses its new wealth to recapitalize our struggling financial institutions.

Jeffery Frankel, a former member of the White House council of economic advisers, points out at a flawed growth explanation. It has been said since 2003 that the growth of Asian countries and new economies have been deriving the resources consumption. As these countries were running full engines to grow at enormous rate so, the resource consumption was too high. More money after fewer resources -> prices rose higher. Now he observes that in its most recent forecast, the IMF World Economic Outlook revised downward the growth rate for virtually every region, including China. The overall global growth rate for 2008 has been marked down by 1.1 percent (from 5.2 percent in July 2007, just before the subprime mortgage crisis hit, to 4.1 percent as of January 29, 2008). And prospects continue to deteriorate. Yet commodity prices have found their second wind over precisely this period. Up some 25 percent or more since August 2007, by a number of indices. So that rebuffs the given justification.

So he comes to a conclusion: real interest rates are an important determinant of real commodity prices. He puts it like this, the monetary expansion temporarily lowers the real interest rate (whether via a fall in the nominal interest rate, a rise in expected inflation, or both — as now). Real commodity prices rise until commodities are widely considered “overvalued” so overvalued that there is an expectation of future depreciation (together with the other costs of carrying inventories: storage costs plus any risk premium) that is sufficient to offset the lower interest rate (and other advantages of holding inventories, namely the “convenience yield”). Only then do firms feel they have high enough inventories despite the low carrying cost. In the long run, the general price level adjusts to the change in the money supply. As a result, the real money supply, real interest rate, and real commodity price eventually return to where they were.

But the events since August 2007 provide a further data point, he observes. As economic growth has slowed sharply, both in the United States and globally, the Fed has reduced interest rates, both nominal and real. Firms and investors have responded by shifting into commodities, not out. This is why commodity prices have resumed their upward march over the last six months, rather than reversing it.

That all brings me to a question, where is the problem exactly? As I see it, the problem entirely lies with the domestic consumers of US. Problem is that this consumption is so high that US consumer is also the world’s largest consumer in entirety. So if they decrease consumption, every big nation feels the burnt on fiscal revenue. Also due to the transaction base being dollar, even monetary health suffers for all nations (even though their own currency gets strengthened!). Fed rate cuts brings the liquiidity in the system, which already is facing the inflation. Now how to make sure that the excess money is going in paying off debt rather than higher consumption level? or should it actually go to consumption to make world stable? Shouldn’t the FD interest rates be increased to suck off the excess of ‘luxury’ money?

Here are some the videos that I really appreciated. One thing we can observe in these lion winners is that most of these go to the brands which have already established themselves with high brand loyalty and hence they move from sales pitch to the brand building or maintained. For example one can see a consistent outflow of some great ads coming from house of Coca Cola, Nike, Bud Light, Dove, Wonder Bra etc. And then there will be some creative flashes from the ones with no so great advertising budget, and I really appreciate these ads. For example you can find below the ad about the blind student’s hostel.

I have put on some videos below, but there are few more worth appreciating, am putting youtube links for the same. Here you go!

Now to some inline videos here:

These guerrilla campaigns never fail to amaze me; the latest has been by Fortune Promoseven advertising agency of Oman. Established as the first private specialized facility in the Middle East and North Africa, Magrabi has gone to become largest medical care network in Middle East. And as I have written before, the guerrilla works either to please loyalists or to create a new buzz, breaking the mental block created due to advertising noise.

One must appreciate that it was a completely novel idea of using the carrots in supermart to attract one’s attention to eye care. Carrots, known well for its high Vit A content are taken to be best natural source for healthy eyesight. But to comment on ad’s effectiveness I would like to know about the class to which the store was catering to. Point is that guerilla campaign has to be very customer specific. The place of execution should be one where you will find lot of intended customers. Now to define the intended customers for a private eye hospital, I would say that it has to be SEC A and B; with disposable income high enough to take care of normal family expenses. As Maslow pointed out, your basic needs need to be taken care of before you delve in these issues present on higher side of ladder.

At the same time I feel that the campaign could have been more vocal. Just asking one to come to hospital for knowing what is good for eyes may not move one to go for a check up or catch information from doctors, who are anyway busy enough to sit with you and discuss the good, bad and ugly stuff for eyes! They could have offered a free eye check up or could have arranged for an eye camp and advertised for it. We must not forget that a normal healthy person would not ideally want to gofor check up as there is a kind of cognitive dissonance there, its not the desired state as we all want to be see ourselves fit and believe that bad wont happen.