Just like loose monetary-policy, loose Fiscal-Policy too is
responsible for currency de-debasing... If we are going to follow China and some other developed countries then we will have to go through currency re-denomination
every-time inflation is too high... Too much inflation debases the currency and
people start carrying large volumes of money which is unnecessary, therefore,
countries apply currency-re-denomination which reduces the volumes of notes and
makes the new currency re-denomination stronger, the new currency will be
stronger. Higher re-denomination indicates loss in the value of money… But, the
logic is, if everything’s’ value grows as time passes and investments we make
also grow, then why the value of money decreases as the time passes… The trend
across the developed countries is that their population rate of growth are
contracting which means less demand for their products and they are now too
much dependent on exports for growth, therefore, we can conclude that as the
time will pass supply will eventually outstrip demand and prices will start
falling, in one word- deflation, as we have experienced in Japan, the US and
many parts of Europe… Therefore, the pattern we are observing is that prices will
fall as the economy will grow and supply improves… But, prices can not fall
below the lowest denomination of any currency and in this situation if we want
more demand we can choose to increase the real value of money, a rise in real
wages, incomes and profits… by applying a lower re-denomination of the
currency... But, in lower re-denomination the old currency becomes stronger and
the value of money increases…
During the past decade Germany has relied on low prices
and wages, in sum-up internal devaluation, to keep its exports competitive
which can be said to be a good policy in international-trade. Both internal
devaluation and depreciation of domestic currency affect prices to increase
demand, but with a difference... The former directly lowers prices by a
consistent monetary policy while the latter decreases prices relative to income
by depreciating home currency to increase demand for exports... However, the
latter option was not available to the country since it is a part of currency
union and shares its currency with many other countries... External devaluation
was not possible... And, the trick, internal devaluation, did the job... Apart
from China , Germany is
another country which has considerable surplus in international-trade... Its
foreign-trade policy can be said to be a success as far as its exports and
surplus is concerned... But, lowering prices and wages are constrained by lower
nominal price and wage rigidity, a corner-stone of the Keynesian Economics
because it helps clear the markets and achieve full-employment, another goal of
policies, after price-stability... But, the trend/pattern we have found that
there is nominal downward wage rigidity but prices show no such pattern...
there has been a consistent pressure on prices, in almost all the developed
countries, to go down which has reasons, too... Because, in advanced countries,
as compared with developing ones, where population growth rate and pressure is
less, supply easily outstrips demand and in case of a deteriorating external
environment, inventories easily start piling-up and economic activity
slows-down and especially after the Minsky-moment which says there is an
increase in risk-taking and debt after a period stability... Too much debt is
responsible for low demand... Economists say that inflation erodes the value of
debt because value of money goes down... It is good for the debtor, but bad for
the creditor... Economists look to favor the debtor and ignore the creditor who
has worked to earn that income; therefore, i think the economists should start
favoring the creditor... Low real interest rates are good for investment, but
bad for savings... Savings are discouraged and investment is encouraged... The
question is how is this going to work because without savings how investment is
possible...? To keep the savings match investment, or the other way, too... We
need to keep savings attractive enough otherwise we will fall in the
liquidity-trap because people will prefer accumulating reserves instead of bank
deposits... therefore, to avoid liquidity- trap the central-banks must keep the
bank deposits attractive... Very low levels of interest rates are not good for
savings and investment, too... However without its own currency Germany will
find it difficult to move from here... Further, internal devaluation will
require Germany 's
own currency... In internal devaluation prices can not fall below the lowest
denomination of Euro and for further fall in prices Germany will have to float a lower
denomination of Euro... And, external devaluation is not possible without its
own currency and the gains will be shared by the other countries in the Union ...
We prefer inflation over deflation because it reduces the
value of debt in terms of sacrifice made to repay a loan... Inflation makes the
value of money to fall... and if inflation starts falling it increases the
value of money in-hand and we will sacrifice more this time... This is a
standard explanation "why we choose inflation over deflation..?" But
as far as income is concerned it is fixed in the short-run and if under this
condition prices start falling within limits it should be a gain because people
will save more and will repay their debt soon... This is totally meaning less
to assume that the debt condition will deteriorate... Falling prices will
release more money for debt-repayment... We use both, fixed and floating kind
of interest rates for loan repayment and the banks can adjust interest as per
the client's real sacrifice. In this condition banks should try to neutralize
the sacrifice. They should move interest rates to achieve this end... Floating
rates are (i think) are more appropriate the neutralize the sacrifice...
…”unemployment is high and deflation risks persist” it means
we need to remove excess supply of labor by reducing wages/income. Deflation
means prices are falling, a downward bias... it means the market is trying to
correct itself but our inflation targeting is making things worse. We are not
trying to let the popular wish materialize. What we should do is to let the economies
deflate. Prices and wages/income will fall. But we have evidence of nominal
downward-wage-rigidity in many parts of the Europe
but as we say that there is a downward pressure on the prices which is an
evidence of no downward rigidity in case of prices, opposite of what Keynes
said. It means prices will fall more than wages means a rise in real
wages/income. Which would increase demand to remove excess labor supply.
Precisely called (again) the Pigou-Effect. And, if we want to increase the
wealth-effect we can float a lower denomination of Euro which will increase
the space between which the prices can fall. I think the Union
should let the member countries with high unemployment deflate and low
unemployment countries inflate their economies (already suggested by Paul
Krugman). Precisely means real appreciation in countries with high unemployment
and nominal appreciation in low unemployment countries. The economies should
grow and appreciate either in nominal sense or real sense. I think the Union should give the countries liberty to print
currencies in lower denomination (of Euro) which is expected to keep
money-supply intact even in situation of distress. They are too much dependent…
We can always use paper. Paper's value does not change
(little). And, we can periodically infuse more and more purchasing power
without engaging metal, if we are in deflation part of the cycle or an induced
fall in price-level. Prices will go down, but we can infuse purchasing power
and demand within the whole economy at one strike. Fall in nominal wages but
rise in real wages. We can easily create wealth even under falling prices. But
people need to have cash (a little saving in form of cash) and less inequality
will be more helpful for equality concerns. For example we can, in INDIA
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