Labor is Scarce...

Article;

GDP Growth Revival Doesnt Need Another Rate Cut... 

Comment;

The article talks about real interest rates and indirectly about the cost of capital. But totally ignores the labor and its cost (wages), the real impediment to growth. The level of unemployment is a real constraint, about which we are lacking updated data (INDIA). Investment should increase up to the point of full employment and after that wages keep on increasing because the market then competes for labor because, again, after that labor becomes scarce. After full employment only wages and income increase and when people have more money they start speculating which creates bubbles with the economy. The gap between real and nominal interest rate increases (after full-employment) because production can not be increased without labor, it is fully employed. Both labor and capital are means of production but labor is more scarce than capital. Actually capital is not scarce, at all (read Keynes General Theory) we have witnessed quantitative easing (money printing). Any bubble is created when only nominal interest rate increases and not real interest rate which depends upon production of goods and services. The credit growth in INDIA is 16% and the deposit growth rate is around 12% which means demand for funds is higher than the supply and when demand is high, and to increase supply we need to offer high interest rate to depositors; Inflation is eating into the savings, people are saving less, now. We need to offer higher interest on savings so that people consume less and save more to maintain the supply and demand balance…