Budget-2013 Macroeconomic Challenges Ahead of Budget
...There was a
compositional effect as household savings in gold and real estate increased
dramatically, essentially to hedge against inflation. Prices of both these
assets are subject to bubble type effects. If any of the bubbles burst, there
could be negative wealth effects...
Comment;
If the gold and
real estate bubble bursts prices will come down with gold and real estate
prices but that would increase the value of cash. People who have cash as
savings will find the price-level cheap after the bubble bursts. The value of
cash will increase.
To elaborate I
would like to take, those who disagree, to a situation. “Other things remaining
constant, level of employment and income constant. A bubble, say in gold,
bursts with a government decision that it will never put its money in gold in
any form, directly or indirectly. Or simply the government will never buy or
sell gold in any form. And I think this situation will have a devastating
effect on gold prices. Nominal prices are very much higher than real prices.
And in the long run nominal prices tend or converge to the real prices which is
always lower than nominal prices, it’s an expectation not a prophecy, may be
just mine. And everybody will try to sell gold at the same time. Prices will
start moving down unless everybody who wants that gold gets it, and market will
undergo a correction, a downward spiral. And at lot of wealth will go down the
drain. But people who have a job and lot of cash will gain from this situation
because prices will come down because, again, due to low economic activity.
Luckily not that low as in a housing collapse because that is a labor intensive
industry and generate a lot of employment. People will go through a loss
because of gold and will save more this time. Consumption will lag behind.
Prices will come down definitely. And, if in this situation prices come down
that will mean that we can, now, buy more than before. And, if we have a lot of
cash then we can buy a lot more.”
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