Which way to go?

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…