Economies, world-over,
are experiencing structural-challenges , because of money and irregular changes
in money-supply, depending on the level of inflation and employment, to affect
the level of consumption, level of income(profit, salaries and wages) and
thereby the level of growth. Here, profit, salaries, and wages, can be taken to
be three classes - high, middle, and low. As we commonly assume and assume it
right that all profits are invested, salary is divided between transaction,
precautionary, and speculative demands, and, again, we rightly assume all wages
are consumed. So, as far as, the threat of inflation is concerned, at a
particular point of time, for high-class it is zero, for middle-class they have
a capacity to absorb the shock but at the cost of savings, and the low-class,
either curtails consumption or loose whatever little savings they have. So, in
the next-period, if we assume an increase in money supply and all three types
of income, profits will be invested, salaries will be divided between the three
types of demand, and wages will be all consumed without affecting the savings,
and would directly affect the level of inflation, depending on the level of
stocks of basic goods/services. A good stock is likely to absorb the increase
in the level of demand and an insufficient stock would add to inflation,
spiraling all over the economy, increasing the cost of economic-growth and
prosperity. Therefore, structural-challenges mainly imply the supply sides,
supply of money and basic goods/services. Changes in money-supply, through
interest-rates or printing new-currency, as we all know, affect the level of
inflation and thereby the value of money.
Adjusting interest rate
as per the economy’s need is an old and common practice, but the latter is not
common and in absence of a standard, gold or debt instruments ( securities and
others) is a tool to exploit long-term opportunities in the short-run,
responsible for frequent trade-cycles. But, if it is accepted as a policy-tool,
by all together, and no one is left to blame other, then, I do not think it is
a bad idea and discriminatory policy actions that affects the
global-welfare-equilibrium, if not positive, is not welcome. In particular, i
do not think there is a difference between long-term and short-term objectives,
except one, savings for the coming generations.
The recession has left
us with low-level of demand and the only way out is to affect the level of
demand with a reasonable level of inflation. And, since Economics does not
believe in charity and a Keynesian solution, digging and leveling, does not
seem rational, not creating any real-asset, besides its multiplier- effect
through effective demand, not necessarily through the demand for basic
goods/services, and also through the spiral-effect of industrial goods/services
on basics goods/services without inflation is not possible. Therefore, an increase
in the rate of interest would bolster savings and investment, and, income,
savings and purchases due to intervening deflation, lower prices and
multiplier-effect. Demographic-structure is also a function of savings,
especially for young-couples in developed regions. Another effect of high
interest rates would be on expectations, often taken as an indicator of
recovery.
In a capsule, we can
choose to increase the level of demand keeping the inflationary expectations,
mainly a result of prices of basic goods/services, as low as possible to avoid
the pressure on profits to increase salaries and wages, thereafter. And, a
policy-mix is always good to know what works better in a particular situation,
if we are confused, and apply the one which works better than others, in a
greater magnitude.
Let’s be HOPEFULL!!!
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