The World We Live in...

Have a look on the link below,

'Krugman living in parallel universe'

The purpose here is not to defend either Krugman or Ferguson but to keep away the looming threat of a longer recession in the mind of the people that the Government is not much constrained to put the economy back on it usual track- higher employment. The call for a Balanced Budget which became imbalanced due to higher consumption in the past periods at a time when people are reluctant to show what they have got for the economy –consumption or savings- due to the insecurity they feel about the condition of the economy is averse to the common knowledge in which investment, government and/or non-government, and production rise to increase the level of employment. Here, the multipliers, employment and investment, work to result in higher employment and investment, and a higher rate of growth. The inflexible attitude of fine tuning the economy’s budget and advocating a balanced-budget at a time when people, market and the Government all are resource crunched and money supply took the route of international trade and exchange markets instead of domestic markets will be like cutting the branches on which your sitting at the moment. Fiscal consolidation not aimed at improving economy’s health and only for improving balance sheets is not a good idea. We should not forget that the US’ social safety nets like unemployment benefit have only saved it so far, whatever little. The purpose of any economic system is not to make living conditions of its in-habitants worse rather it aims at improving them.

Although America pursued an aggressive monetary policy in the past but I do not think its purpose was to create a Great-Recession. Actually, recessions and depressions are general features of a capitalist economy and the US is no exception. This is happening since the Great- Depression, we can easily see the US falling in recessions every 5-10 years since 1930s. We live in a diplomatic WORLD and things are not as straight as they appear and every country has the right to make choices that increase the well being of its people, even if it is in the form of lower prices. Prices rise and fall in the US every 5 years; they are neither increasing continuously nor decreasing continuously. The reasons may be political, you can not deny, but since the US is a big importer too, its actions affect international prices, they rise and fall, too. America has never been a colonial power but its policies, not only the recent, throughout its history have been around scarce resources like oil. When recession broke prices, especially oil, went down and it helped all the oil importing countries because oil prices fell globally. The only thing that goes against America is the way loans were distributed. They were full of short-comings and were below the standard lending practices.

In case of monetary expansion in the US there is not much to do since interest rates are already near zero. The alternative left to the US is to set higher inflation targets and print some currency to fund production activities, public or private, in order to boost employment and demand. And, the decline of Gold-Standard makes a case for such an action. Countries have resorted to policies like increasing income to have a hold on scarce resources in face of rising inflation and a currency redenomination, later. Thus, if the US chooses to inflate its market by printing currency it does not seem to be a bad idea. Moreover, the US can also decide to pay its debt with the same money. It has happened before. But one problem may arise, after all, increase in imports. How the US is going to handle deterioration in its balance of payments situation?? Nationalism instead of protectionism may help here. BUY AMERICAN!!! Or the US can invite China to make investment in America especially in manufacturing following Paul Krugman’s 1991 paper, “Increasing returns and Economic Geography”, if demand tends to be larger in the US. It will benefit both the countries in terms of foreign exchange, transport- cost, investment, and un/employment.

As far as structural unemployment is concerned it is more due to the cost cutting behavior of the firms. Firms are on a hunt to find multi-skilled people so that they have to pay less in face of recession for the same services by consuming same amount of labor. Nevertheless firms will always try to maximize their returns on investment. Is it really a problem? Very recent in discussion...

Let us be hopefull!!!!!!!!!!

With or With-out Gold Standard...

Actually, the point is not so much about gold standard or dollar standard, in international trade, or simply money in local markets. The point is keeping the value of denomination intact………, i will complete it later. Being a Ricardian, and a follower of many more, but as a student of economics i would like to share what Ricardo said about the discipline. He said the subject-matter of Economics is to explain re/distribution of income. Skewed or un-skewed, i do not know. But statisticians like un-skewed and symmetrical graphs, a figure following other and a point following other. Therefore, completing the above line, the point is keeping the value of denomination intact so that the distribution of income according to ones ability becomes less skewed and faster. It does not matter that the population has figures like $1 billion or $1 a day. But we are all constrained by the working-hours a day regardless of our ability to satisfy the demands.

If the value of denomination keeps changing it will take more time to distribute the fruits of hard work evenly. And, this is what happens with money due to inflation. What inflation does is that it reduces the value of money if income does not rise in the same magnitude. One stand on inflation says that it helps distribution of income but we rarely find examples where income increases simultaneously to offset the effect of inflation and if it does happen it happens later, and that’s a circle, vicious or not hard to say. I think it vicious. And, we end from where we start.

The question is why Central-Banks increase money supply if it devalues money? The rule that follows here is, if the supply increases, it will devalue the asset, be it gold or dollar or rupee. The question regarding the current recession is that, where did all the dollar go if it did not reach the banks again? The thing that happened during the Great-Depression and in Japan in 1990s, happened again in American recession and, the result has been liquidity-trap, in all the three instances. What the liquidity-trap does is that it increases the asset demand for money and people, since interest-rate on deposits due to low economic activity becomes zero, keep money as an asset rather than a means to assets. Precisely, the incentive to save and invest becomes zero. People in this kind of situation, liquidity trap and low inflation, either expect that prices will fall further or interest rate will increase in future, and then they will use their reserves to get benefit from the situation. But in the face of this kind affairs for a considerable period of time when inflation do not fall further people do not find it worth while to keep money for purchases later and start purchasing or they wait for interest rates to increase so that they deposit money in banks and earn interest income. There is one more concern and that is security of the money. Nobody keeps large amount of money at his home due to the threat of theft.

The implication of this kind of affairs is also worth noting. If people start purchasing it will directly add to inflation and if they start depositing money it will indirectly add to inflation through the purchase of consumer durables later. Therefore inflation is inevitable in the process of growth and development. And, then there are others who just save and deposit for increasing scores, their consumption is stagnated, but they are crucial from the point of investment. But investment without anticipating demand is not possible. Therefore, in the chain of profit and growth generation demand comes first. But in money economy money supply or purchasing power constitutes the demand. Now can we say that supply creates demand?