At one occasion, according to a Fed official probably the
whole QE program is misdirected and even harmful... Moreover, asset price
inflation and another-bubble fear could be the probable cause of sooner than
expected QE tapering. But, at another occasion Bernake said that interest rates
will remain low ever after the end of the QE program until unemployment rate
drops significantly. We need to look carefully in to the words “misdirected and
even harmful”… i think the Fed is going to accept its policy mistake… because
of its wasteful effort to reinforce higher inflation expectations to come out
of liquidity-trap... It may be wrong to take the economy in the wrong direction
when the economy should go for an internal devaluation which means a lower
level of prices, wages and income to achieve full-employment but the economy
would generate demand by lowering prices, but, we have
evidences of downward wage rigidity which may prove useful because prices will
fall more than wages and that would mean a gain in terms of real-wages…
However, Keynes said the same thing for prices, downward rigidity… But, we have
evidence of persistent deflation in economies like Japan… The Fed too said it was
expecting a deflation and is fighting deflation. So, downward price-rigidity is
not supported by the evidences. Wrong policy moves…
The Pigou-Effect works in the liquidity-trap… We have
reduced unemployment-rate close to its natural-rate, but economists say that
the US
economy is still stuck in liquidity-trap… To overcome liquidity trap Keynesians
recommend the use of Fiscal-Policy, but, again, the Public-Debt of the country
does not allow it to loose string… So the economy has totally failed to cross
the trap… sorry… but, by not using any of the above methods… so it is neither
Classical nor Keynesian… However, we can not reject the thesis that politicians
are not necessarily economists. Pigou says, in the liquidity-trap, when people
accumulate reserves in expectation of lower prices ahead and are unable to arrive
at the right conclusion, because they always expect that prices will fall more,
greed…, it is good from the point of view of growth to let the prices fall and
help clear-market and generate more demand… In this state of affairs, if
interest-rate is at minimum as it is now, it will definitely help the economy
to pick steam… economic-activity always awaits low interest rates… Inventories
will be sold-off and low interest-rate will help improve supply for future.
Economy will gain momentum… Once Bernake himself said, not long back, that
“little deflation is not bad”… Pigou says lower prices will increase
real-wages, what Yellen and many other economists want… higher wages! Higher
real wages and income should definitely reduce voluntary-unemployment, “stopped
looking for jobs”. Still early to increase rates…
We have sign of persistent deflation or at least a pressure
in many parts of the WORLD and Germany
which went through internal devaluation which means a downward pressure on
prices and wages, and, competitive exports. Therefore, certainly there is a
question regarding the right policy… internal devaluation like Germany or internal revaluation like the US… I would
support Germany
because of my belief that the value of a currency should rise domestically also
and not only in terms of another currency. Prices should fall in the long-run
and not rise as normally happens. The value of a currency or a Dollar or Pound
should rise domestically if we claim to develop in the long run. The value of
domestic-currency should also develop…We do not need persistent deflation but a
short-period of lower prices to remove excess supply and then back to the
normal. Higher real wages are easy to achieve than a nominal appreciation
during a recession hang-over. Our other problem is liquidity-trap a situation
which has made people accumulate reserve and post-pone spending, because they
are expecting deflation, and interest rate are also at zero which makes holding
account in banks and holding money perfect substitutes. However, to improve
savings in banks we need to improve return on savings, a decision which is
likely to favor the rich… I think deflation is also a rational expectation,
because when prices are elevated after a period of increase people expect it to
come down during recession. We should not go opposite of the
popular-expectation… Economies like Japan, Europe, and the US are trying to
ward-off deflation, they are not fighting with falling wages, directly,
although, indirectly, they are trying to push income and wages which will
infuse demand in the economy to consume the inventories, sales are down
consumer-spending is low, employment has gone down, interest rates, the price
of capital, are zero but wages, the price of labor, has become stagnant, low
interest rate means we can now buy more labor, labor is in plenty and capital
is cheap… but demand is low due to debt-hangover… To bring the economy out of
this stagnant position, we need to increase wages and income, so that
debt-repayment does not affect consumer-spending. There could be two possible
paths, mentioned above, of recovery as far as growth rate of the economy is in focus; either we
increase real wages and income or increase nominal income… Since the economy is
going through an over-debt period, it is a major concern.
We need to weigh down the trade-offs required for the above
two paths… I think the monetary policy is potent to achieve these two… because
by manipulating interest rate up monetary-policy affects real income and wages
by reducing the price-level, they go up… nominal income is affected by lower
interest rates, demand goes-up, incomes and wages go up… By going for rise in
real-income by lowering prices, Paul Krugman says, is bad for debt, but when income
is increasing how it can be bad for debt, I think this fear is baseless. If
income is increasing, either, nominal or real, where is the difference (?)
income is increasing after all, income will go up and it will be easy to pay
for debt. At a material level there is no difference, demand will go up… with
only difference regarding the value of debt… But, not everybody is an economist
and no one cares for real interest rate, people not even know the difference
between real and nominal interest rates. Low interest-rates will definitely
help debt-repayment. INDIA
is a good example how real interest rates increase investment, real interest
rates in INDIA
are negative and growth-rate is slowing. However, in both ways income increase
and when income will go up debt will go down, too, when interest rates are
already zero… How ever in nominal appreciation prices may increase which is,
actually, bad for debt-repayment…
