Tuesday, March 22, 2011

US’ Capitalism …

Prices play an important role in planning our present and future.
The US believes in capitalism, i mean it is a market economy and prices are determined according to market (demand and supply) therefore part of flexible prices in the utility basket is bound to be higher than the sticky ones. In INDIA the government controls prices of oil and gas so it is considered to be stickier than normal goods and services, but in case of labor, market determines the price, it is almost unorganized. Just opposite of the US, where stock market in case of oil and strong labor organizations take care of the factor rewards.

A paper by James D. Hamilton, Department of Economics University of California, San Diego at http://dss.ucsd.edu/~jhamilto/oil_history.pdf says, “...All but one of the 11 postwar recessions were associated with an increase in the price of oil, the single exception being the recession of 1960. Likewise, all but one of the 12 oil price episodes listed in Table 1 were accompanied by U.S. recessions, the single exception being the 2003 oil price increase associated with the Venezuelan unrest and second Persian Gulf War…”

The point is, if oil prices are an indicator of recessions in the US why not the government takes care of oil-prices instead of market dealing with it. Since, we have an insufficient capacity around the world to absorb the rising demand for fossil fuels. We need a big-push so that the fear of peaking oil prices and the expectation it is generating through inflation could be reduced. Since transport-costs are important in international trade, according to “Purchasing-Power Parity,” it is going to spiral all over. Emerging economies are already experiencing high levels of inflation.

But, expectations may not work if the person does not act and to act you must have information and money. Like, cause and effect, and, stimulus and response it is not as spontaneous as it is assumed in ECO-NO-MICS. Information works differently for different people, therefore you can not blindly reject the above hypothesis that it can generate all the three expectations at the same time. The only thing certain is that it will move and people who have access to information and resources will act. I mean not fixed at its current level forever.

Here, we mainly concentrate on Keynes’ precautionary demand for money which can go either way, for consumption or for investment, accelerator or multiplier. It is the money of our use. Since the US economy is recovering from a liquidity-trap and people have maintained an excess capacity during that period.

For simplicity we assume that income is constant and people are going to manage their excess reserves. They are feeling insecure about their future and are trying to anticipate the next policy moves, and, have to make choices. There are two types of people, relevant, from the point of view of policy. People who just profit themselves by anticipating the move and then there are others who will profit themselves by that particular move.

A price rise generally indicates that people will buy more of a good if they have information and resources, and it is only possible if it is available, or there is a chance to increase supply in the next-period. So it means somebody is selling it. But the opposite may also be true, it may not be available. And, there is a need to give the market a push, means policy intervention either by government or central bank(s) and the market is inefficient in giving results, employment at the targeted level.
But the irony is that all the three can not happen at the same time and in our stream someone’s loss is others profit, i mean a zero-sum game.
If fiscal deficit is so large that the government can not commit to generate additional income without increasing tax burden by using fiscal policy and the central-bank clueless to what to do when interest rates are already near zero.


Suppose the central bank commits to buy bonds of a certain value in successive periods. But, the pressure on prices sharpens due to increase in oil and transport cost, and oil companies are hiring new labor which increases wage rate although increase in the price of core commodities remains constrained, but not zero, due to increase in money supply by purchase of bonds. And the bank’s commitment to let the inflation and employment float to the targeted level is yet far and can not be realized without further increase in the general price-level.

After-all it is creating uncertainty for the growth of world economy and the US' recovery also depends on the demand generating outside it, although not solely. But, we can say a major part on the basis of previous recoveries.

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