Will currency interventions hurt the global economy?

There are currency interventions/manipulations and then there is currency management. The difference being that the currency management follows a set of rules mainly based import-export indexes and partially, but not less important, on domestic monetary policy whereas as an intervention/manipulation is based only on the motive to boost exports and restrict imports and thereby increasing national incomes. The equilibrium in the balance of payment (BOP) is mainly a function of consumption through international trade, exports and imports, and when exports equal imports the international trade and the value of currency can be said to be stable. The effect of monetary policy on this situation is also worth noting. An expansionary monetary policy is like to partially increase the demand for imports and partially the demand for home products and a contractionary policy will do the just opposite. The features of a currency, like strong or weak, tells us something about the stage of development of an economy and we learn that a strong and developed economy would have a strong currency and high levels of consumption, for example the consumption level of oil, as compared to a weak currency and a weak economy. The point is that currency should reflect the stage of development a country is in. Instead of oil we would use the level of voluntary work/leisure to define the stage of development. A high level of voluntary leisure is associated with a developed and strong currency economy and vice-versa.

In international trade we can correlate work/leisure and consumption, especially of imports. A developed economy may have less work, more leisure, more consumption and more imports or exports equal imports or sometimes even more exports. And, a developing economy would have more work, less leisure, less consumption and fewer imports or less exports or sometimes imports equal exports. The pattern is more or less evident!!! To cut the chain short and for simplicity too, we will only correlate leisure and the level of imports with the stage of development. Higher stages of development may be associated with higher leisure and imports and lower stages with more work and less imports.

Currency intervention without relying on domestic demand with a sole aim to boost export and earning foreign exchange may not be good for a economy for it makes the economy dependent on foreign trade and make the system prone to demand side shocks resulting in the trade partners economy, which is beyond an economy’s control and it chooses to curb imports in order to maintain equilibrium in the BOP situation. Appreciation/depreciation in a currency depends on surplus and deficit in the BOP situation, and also on domestic monetary policy. When exports exceeds imports, i.e., in case of surplus, a country should choose to appreciate its currency so that it reflects the purchasing power of its currency and the stage of development a country is facing. On the other-hand, if imports exceed exports, i.e. in case of deficit an economy may choose to devalue its currency following the set of rules instead of resorting to trade barriers that may trigger a chain reaction in form of retaliation. Or it may choose to invest in import substitution industry, the best strategy. However, it is not difficult to find economies with high imports-exports with inequalities of income and wealth, and the level of poverty.


When we talk about increase in imports and exports we should mean how they are contributing to reduce inequality of global income and wealth. If the correlation between imports-exports and poverty reduction is not positive the whole purpose remains unfulfilled and the distribution of prosperity over the earth’s surface would remain uneven and would add to instability in many forms, of which depression and recession are only two of them.

The question is why a country would want to increase exports by working long hours even when the domestic demand remains unmet and there is a room for employing resources domestically? Nobody likes to serve anybody by affecting its work-leisure balance and consumption.

Has Economics Changed Over Time....

We might think that the crisis has changed economics but is has not; rather, it has changed the way people view at ECONOMICS, economists and non-economists people. Everyone is connected with Economics one way or the other and economics treat every one as its agent, and more precisely as economic agents. Consciously/un-consciously we are at its job. To relate it with a more scientifically proved phenomenon which we famously call the CHAOS-theory (not sure about its origin, the word) which says under the cosmos run an underlying reality. Manifested and/or identifiable. For the majority, particularly individuals i do not know either it is manifested/identifiable, or both. For me as an economist, im not a complete, and as a man or common man, or both, i see money/wealth, and as a common man in particular, i see that we are all living- beings, we are all living, we are not dead, even collectively. Can we say “yes”? Or we would like point out the colours? Even there we are one. We use same kind of colors and with almost same frequency in our daily lives. When we go to shops our preferences are not colors. We go to shop and do not say “ I want toffee with a with color for my kids”. Kids may do that. We say 4 toffes or 1 Kg sugar. Colour white/brown? Not often, but some do. Who? And nobody says we are alive we want this thing. In shopping malls, we go and pick the article we want, ask or read the prices and pay for it. Are we ? I know we all. Or, the other thing we say i’ll pay later, its for convenience without creating ripples in the system, if the provider it not constrained or can manage. They work with a capacity for such a convenience to the consumer. It’s a commitment to pay later. And most of the times we pay for it in many forms. But you should have a good history and/or a good-rapport. This was all to review our systems. The BASICS. Is that?


So we were at the chaos theory. It, in particular says, “even the apparently random phenomenon have underlying order.”


The terror of inflation in the minds of economists is same as the fear of a prices rise in a common man’s head. But at the question of relating inflation to a common price rise we will not find many satisfying answers form a laymen/common-man. An increase in demand for money to contain purchasing power or the cost of livelihood results in inflation and in some cases higher interest rates. In a nutshell, interest rate is the cost of maintaining/manipulating consumption and its business is banking. Many times consumption soon/er. Usually higher interest rate results in higher savings and sometimes at the cost of consumption. Both consumption and saving patterns are flexible upwards in the long-run. But when compared in the short-run consumption is more flexible upwards than the saving pattern which results in higher demand and inflation. Inflation is a short-run pheonomenon in the long-run we do not assume inflation.


There is something as economic consciousness same as in any other field, a state in which claims that he is sufficient to tackle a situation pertaining to his/her economic well-being in order to feel a sense of stability on a physical/material as well as mental/psychological level. This economic consciousness is rightly called by Joseph Stiglitz as information (a)symmetry. How to deal with an economic crisis with the resources at hand would place many of us in an uncomfortable situation and more uncomfortable with limited resources. How to manage resources and how to use a market for best possible outcomes/returns is not less important than any art of living because it adds to a sound survival. The point here is to make the masses more conscious to deal with an economic situation and crises, in particular, and not only the privileged ones, and requires a proper training to use market and not to be used by it.


Markets may be sufficient /insufficient in supplying demands given the incomes depending upon the size of market. Naturally a big market will have more options/substitutes to cover every income group. Understanding the markets and their attributes is not an easy task and only those who want to know it know it. We can find out an array of attributes of specific markets.


Inflation does not pose much problem for those who have right information and/or reserve capacity but for those who do not have these. Since these are indispensable for choice they can help in altering the consumption pattern of the economy as a whole, although in parts. Efforts are required to educate people to help government to tackle inflation down and the pressure to increase interest rates. The problem may not be solved altogether but we can always reduce the pressure through right choices with in our budgets.

Our Healthy-Wealthy Poor

"Growth in the nineties averaged about 6% but now we are consistently doing better at 8%. This has led to a sense of complacency and even triumphalism amongst policymakers and the media. The ‘second fastest growing economy’ appears to be waiting comfortably for China to stumble so that we can perhaps even lay claim to being the fastest growing economy in the world.

Some among us look wistfully at 10% and wonder why with our demographic dividend we do not do significantly better than 8%. Others argue that even the current 8% growth is jobless in nature and that what we need is a lower rate coupled with jobs creation. Then there are the inclusive growth mandarins in the ruling party who simply want funds allocated to relevant vote banks irrespective of whether the extra funds are the product of faster growth or higher allocation from a smaller pie...."

Economictimes/The 8% complacency trap/Sumant Sinha

Comment:

Higher growth rates are the result of higher inflation targets, and if we choose inflation at 8% we can grow at 8%, if we choose inflation at 10% we can achieve a growth rate of 10% and so on. No doubt we are the youngest economy and the scope for boosting consumption is enormous in the years to come. But the composition of poor in our economy is also enormous and does not support the idea of choosing inflation and growth at 10% because the income of the poor is not increasing at the same rate. And, if we can make sure that their income also increases with the same rate we can choose to grow at whatever rate we like. Nevertheless the idea remains same INCLUSIVE-GROWTH. If our growth rate does not include the dream of making poor healthy and wealthy all wisdom will be of no use. Some grow and some choose the way to grow to grow. The choice is ours, we keep ourselves before the economy or we choose economy before ourselves. When we talk about economy we talk about rich and poor alike and the same time. But how can we forget about its composition. It is the demand of the poor which is going to drive the economy for a very long-period of time. The rich do not care about inflation, it simply does not matter to them or even if it matters it matter a little. They do not curtail consumption or fall short on our nutrition-calorie chart.