Demand and Supply are Intertwined...

 Like recession, periods of high growth are also self-reinforcing due to EXPECTATIONS. This time inflation expectations, in the US were that it would subside soon, therefore people did not cut spending. The memory of the last decade's lower than 2% inflation reinforced those expectations.

If we know the expectations we could avert a negative outcome or even reinforce a positive outcome by the way of some economic stimuli.

This time people believed that inflation would come back soon so they did not cut spending and it did not cut the supply by lowering employment which kept reinforcing lower price expectations.

Prices are the oldest most reliable indicator of recessions and low prices could soon turn into a full-fledged recession, and the Fed thinks that may help avert a recession by cutting the interest rates.

Nonetheless, price expectations could help manage demand, supply growth, and expectations. It is a dichotomy that high price expectations are managed by high interest and lower price expectations by lower interest rates due to stress on the demand side and could reinforce expectations.

However, from a supply-side perspective, high price expectations must be dealt with by lowering interest rates and lowering price expectations by increasing interest rates, which could diminish expectations by affecting the productivity of capital, demand, supply, and growth.

The work of central banks is to reinforce positive expectations and diminish negative expectations though it is a time consistency problem since at times it wants high inflation and sometimes low inflation because prices are variable.

Nevertheless, it is a long debate whether we are managing demand or supply, but both are intertwined. During low growth, demand, supply, and price expectations we cut interest rates and during high growth, demand, supply, and price expectations we hike which could be self-fulfilling and could be avoided by maintaining stability in the interest rates.

Stocks’ Nash Equilibrium

Speculators bet on market behavior in order to gain from an investment though everybody is speculating on one thing or the other and largely all are investing time and money on something in expectation of something, nonetheless, it is largely not pointed that speculators’ behavior makes the market behavior that their aggregate actions decide where the markets would move which depend upon their expectations ie aggregate expectations and that is how the subconscious of the market works or the underlying subconscious of the investors. The aggregate expectations decide the market behavior and actions and outcomes based on the available information. On a micro level, a person increases spending and investment if he sees that prices are going to go up in the near future and vice versa and we could easily generalize it on a macro level that people increase spending or investment when they expect prices to go up which actually increases the price and the other way, too. That is, aggregate expectations and actions are self-fulfilling. 

Inflation and interest rate changes are self-reinforcing, higher inflation means people would demand more and supply would go down and prices would go up again and a higher interest rate means lower employment and demand and supply, too, which further increases prices. Demand and supply are not two, the person who supplies, demands, too. Our ability to supply depends upon how much we demand, what we demand is what we supply, and if demand goes down supply goes down, too. Demand could not be met without supply. Maintaining stability proactively fosters the central bank's credibility and for stability; a top and bottom of inflation and interest rates are assigned to manage demand and supply. At the bottom, everybody would increase demand and at the top everybody could supply which would help stabilize demand and supply and prices and interest rates. Prices and interest rates would move around the Mean or Average of the demand price and the supply prices. It would help reduce uncertainty about prices and demand and supply. Everybody would demand and supply at the same price or interest rates and maximize returns. Excess demand and supply determine future prices. Prices and interest rate expectations could increase volatility, but the central bank's job is to curb this volatility. 

Stock Market is a place where the purpose of bids and offer is to maximize gains from trading shares and require a strategy to satisfy all which is commonly missing, since in the stock market everybody misses the lowest buy price and highest sell price in the short run which leads to missing the long-run highest price targets. Most people regret to buy at higher price and sell at lower prices in the short-run. Both, the people who are buying and selling and even the companies want higher prices for their shares, there is no opponent, everybody is a trader which requires strategy to benefit all by increasing price of a stock. Everybody needs a strategy to excel in the stock market so that prices reach high prices range in the short-run.

If everybody follows profit maximisation behaviour, returns for everybody would increase... Means that people shall set buy limit order lowest of the price range and set sell limit order highest of the price range... If everybody does the same profits would be maximised...

Everybody wants to invest in the stock markets, but very few know that if they follow the profit maximisation behaviour they might be able to get the maximum returns… Yes, if everybody set same buy limit price (lowest) and set same sell limit price (highest) according to price range, profits could be maximised and everybody would gain…

If everybody follows profit maximisation markets could stabilise because when prices are significantly low investors could buy which could increase prices and when they are significantly high investors could sell which could lower prices...

If everybody sets a same limit price for buy and sell, everybody would gain... bid price should be the low price range and the offer price should be the high price... It is like giving some bargaining power to the investors if investors bid and offer at same prices... It would help predict stock prices right…

The strategy of a stock market has not originally taken from the Nash Equilibrium but has semblance with the theory and the strategy discussed here satisfy all Nash Equilibrium conditions that a participant has no incentive to move away from the optimal market strategy for two players, in the stock market the buyers and the sellers.

Economic growth around...

 Food and fuel inflation is high in INDIA... the main sources of inflation... Lower fuel taxes could help lower inflation and increase productivity and demand and growth... Lower taxes could also help... Government is not a family business... It is there to increase happiness and prosperity... productivity increases when the cost goes down, the government is a big cost at present... The government has failed on employment and inflation... There are not enough skills to increase productivity and employment... Personal loans are available easily, but business loans lack as the govt discourage risk taking... One reason for higher prices or inflation is the fiscal deficit, 6.5% of it could increase inflation expectations by economists.

 

Unemployment in INDIA is grave despite being the goal of all policies and all governments and central banks around the world try to push infrastructure and construction as it consumes a lot of unskilled labor and creates a lot of employment and gives rise to shadow banks and asset price bubbles or inflation and instability and correction... like US and China in 2008 and 2023 respectively... The unskilled population is a big burden for policymakers around the World... INDIA's cheap labor is its competitive edge which shall be employed productively to meet its unmet demand... Instead of betting on property and real estate to create employment, INDIA shall try to promote other businesses by subsidizing costs... Credit for investment is costly and scarce in INDIA to do business on a large scale... It should promote large scale business though with proper risk management... Cheap credit is must for productive investment...

 

INDIA has $ 620 billion in foreign debt and it has 600 billion in foreign reserves, the debt if not hedged could create uncertainty for the rupee and inflation and employment which could prove self-fulfilling if people expect that the rupee would depreciate. Inflation expectations could increase nominal exchange rate...

 

INDIA needs FTA for itself, for exports, but negotiable trade for imports, this is the diplomacy part... How the government would increase employment?

 

 

In the US, lower price expectations and higher real interest rate expectations could reduce/delay spending and increase supply relatively reinforcing lower prices If the Fed skips the rate hikes it would not lower supply further and could help lower prices and expectations. Higher interest rates could lower supply and increase price pressure and interest rate expectations. A lower base increases price expectations and vice versa...

 

If people expect that borrowing cost could go down in the near future they might delay their spending which could make rate cuts self-fulfilling and earlier than expected because demand would go down and supply could increase relatively. Money demand lower than money supply could lower market interest rates...

 

People have seen that 2% inflation is possible, last decade, Fed policies with ultra-lose policy, quantitative easing, et al., did not produce much inflation. The memory is still fresh. The supply disruption could be attributed to covid and the GDP and prices have recovered. We have observed a special quantity theory that more money supply reduces borrowing costs and increases supply in developed economies as productivity is increasing, too.

 

Expectations shall play an important role in decision-making because consumers and investors spending actions and actual inflation depend upon future prices in order to maximize gains, they are forward-looking. And, inflation expectations are drifting down and demand and spending could go down, relative to supply and prices would come down quickly because people would delay spending in the expectation of lower prices, faster than we expect, as per rational expectations. Fed's impatience to tighten could lead to lower prices than the inflation target. We forget that full employment is 0 unemployment when people have no incentive to switch/swap between jobs ie frictional unemployment and other types of unemployment due to low inflation and wage expectations because their loyalty would be questioned....

 

Prices and growth are connected and have a negative relationship, higher prices and interest rates lower growth and vice versa, and therefore price and growth expectations are connected, too. Lower prices increase demand and growth, but, lower price expectations, including interest rate expectations, delay demand and increase supply reinforcing lower prices and growth. If we have lower price expectations we might have a period of slow demand and growth though it depends upon the level the Fed chooses to offer. 3% interest rates or 1% real interest rates seem reasonable after accounting for 2% inflation. It could prevail as long as people have rate cut expectations and the Fed would not like to push the economy into liquidity trap because rate cuts and expectations could be self-fulfilling, delay in demand could lower prices and interest rates. Therefore, we might have a slowdown...

 

People realised that price and wage expectations are self-fulfilling and unemployment is no solution to higher prices and higher unemployment would reduce supply further reinforcing higher prices. That could be the collective perception.

 

 

Spending is the answer to deflation to increase demand and defend a bottom while increasing price or inflation expectations, in China. Fiscal policy has a higher multiplier than the monetary policy. Higher money supply could lower interest rate expectations and delay in spending though higher government spending would increase price expectations. Higher inflation and depreciation could increase exports, nonetheless, depreciation expectations could delay export demand. This is the time to increase appreciation expectations therefore selling dollars could help... Higher prices and interest rate expectations through higher government spending could help increase private sector spending and multiplier...

Nobody knows how to maximise returns in a stock. Union is also important in the stock market, unison of buy and sell prices. If everybody set same buy and sell prices profit could be maximised for all. The upper and lower circuit are given, low price range and higher price range, use lower circuit to buy and upper circuit to sell, the market price would be either at the lower circuit or the upper circuit and quite predictable.

Ultimately a successful economy would have full employment and low inflation in order to maximise products, investors' concern is what the prices would be in the future in the short run, everybody wants to earn quickly and easily and have more leisure and health at their disposal by technological advancement. The real wages and incomes are higher in the US and people consume more than in China, adjusted for population.

Collective Consciousness Has Never Been So Speculative...

 Changes in prices and interest rates and expectations are self-reinforcing. Higher prices and interest rates increase demand and demand for money relative to supply and money supply which further reinforces higher prices and interest rates and vice versa.  

Similarly, changes in prices and interest rate expectations are also self-reinforcing, lower price expectations delay demand or increase supply which reinforces low prices and interest rates, and demand would go down relative to supply, the opposite is true, too.  

Therefore, our target is NAIRU, an employment level consistent with stable inflation of 2 or 4%, though changes in unemployment and prices or inflation are again self-reinforcing... Higher prices are enough to control demand, if a limit is prescribed, and rate hikes by the central banks would reduce the money supply and supply and further reinforce demand, prices, and rate hikes...  

Instead of signaling agents, the Fed shall directly communicate to act in the way inflation or prices are controlled, to increase demand or not, or lower demand for stable interest rates and borrowing costs and credit. The Fed shall make people economically conscious of how to deal with prices and interest rates and behave in the marketplace...  

Blue-collar workers' employment and wages hurt more because of the impermanent nature of jobs and their income is fixed in the short run. 

The inflation we are seeing is the product of inflation we have in the base periods, base years are the determinant of the current percentage of inflation, how our past had been, decides our future inflation percentage. Inflation percentages are not directly comparable because the base year is changing every quarter and year.  

GDP at constant prices has recovered from the covid trough completely though and we need stable real interest rates or natural real rates when near to full employment at which there is neither inflation nor disinflation.  

1-1.25% real rates are quite good for savings to reduce spending and lower inflation. Stability everywhere is what we want, interest rate stability is akin to financial stability and stability of expectations.

 

Biden's spending provided floor to demand and growth and increased inflation during a disrupted supply which increased inflation and expectations and actual inflation on a low base.  

The US economy has bypassed one of the major reasons for inflation expectations, now it has a sufficient buffer for OIL prices and the other is labor-force which is still there and the labor market is tight that is due to which we have actually is wage-inflation expectations, possible cause of stagnation and interest rate hike expectations even in a lower inflation expectation environment.  

Lower exports due to the strong dollar, have also increased the supply to the domestic market and contained inflation due to uncertainties like Russian war engagement. The US doesn't need foreign exchange and the economy is close to full employment. Lower import prices have contributed to a disinflationary economy and higher real wages which we want.  

If we are at full employment and prices are going down that natural rate theory suggests that we need to stabilize prices while stabilizing interest rates. Lower price expectations could be self-reinforcing and could increase real rates.  

Low prices and the coupled expectations and conditions point to delayed spending, ahead and rate cut expectations... 

 

It is now common for people that price expectations are self-fulfilling because they are factored into wage expectations and cost and prices, again, which further reinforces prices and is self-feeding.

Rate hike expectations have led to lower price expectations which are also significant, lower price expectations are also self-reinforcing.

 

Rate hikes and EXPECTATIONS and Fed's credibility are important for lower price expectations and delay in demand and increase in supply, at full employment, imports too, due to a strong dollar. 

The developed economies have strong currencies and the developing and lower economies' currencies are weak which is self-fulfilling. In an attempt to reduce the trade deficit developing countries use depreciation to increase exports and this depreciation expectation makes consumers delay demand for weak countries and/or currencies and increase demand for developed countries and currencies. Which is self-reinforcing...  

INDIA may commit to a stable currency in order to stabilize export demand and demand for currency and gradually strong currency expectations to internationalize its currency... Its convertibility and store of value credibility would depend upon its stability and responsible central bank. Chinese currency instability has made it an unviable option... 

Dollars demand depends upon the things the US sells/exports and it accepts only dollars. If that is the right model everybody shall buy, the American dollar policy, and follow the same policy, if that is right. Other countries have made dollar, dollar.  

It seems just that if a country exports higher it shall accept its own currency like the US, any government has to spend that money largely domestically to provide public goods. But it has different values for different countries and that is a partiality.  

Money is a standard that is changing with other country exchange. For the poor it is expensive and for the rich it is CHEAP. This is the World we live in. 

Before the advent of the Internet, the collective consciousness never proved so speculative. When people get a piece of information they act if have an opportunity. Information is flowing freely despite maps and differences. Prior to it, the Fed maintained its secrecy, but now people try to get ahead of the Fed Policy... It has made expectations or collective expectations and actions self-fulfilling and self-reinforcing...