Rajan might lower real-interest-rate...

There is almost an all around agreement that Rajan (our RBI Governor) will cut repo-rate to increase money-supply for investment and consumption demand as inflation has been on a downward trajectory... Monetary-policy is considered to be a supply-side tool to increase employment and growth, and higher money-supply will help by reducing interest-rate and increasing investment, means more-supply of goods and services... More supply is likely to lower prices, the law of supply... Rajan is supply-side economist and he should understand that more investment is needed to remove supply-side problems in agriculture and infrastructure and reduce inflation... Investment and savings depend on real-interest-rate, nominal-or-market-interest-rate minus inflation... Real-interest-rate in INDIA is near 3% (8%, market interest-rate, minus, 5%, inflation) and our Governor has reiterated that he wants to keep real-interest-rate around 1-1.5% to keep savings attractive... Savings are positively correlated with real-interest-rate... In the same way lower real-interest-rate is also supposed make investment attractive... Therefore, as per the Indian condition with lower inflation in the recent data there is a scope to cut real-interest-rate by atleast 1% or 100 basis points... However, Rajan will oblige industry with rate cuts only in several rounds. Moreover, the RBI Governor would also like to match credit demand with deposit growth rate which (the credit-growth-rate) has also been lagging behind due to higher-interest-rate in the past...   Lower real-interest-rate is important to increase investment and improve the supply-side problems... Rajan might agree...

US mothers having more children...

US' rate of the population growth will increase the rate of growth of the workforce/year... Means more demand, investment and growth... The country's actual, warranted and potential growth rate will increase... Actual growth rate is what the economy achieves... Warranted growth rate is what the forecasts say, the projection... And, potential is what is the economy's capacity. In case of higher population growth rate these all might go-up... The US does not have an age-limit for education and gap in it... actually getting degrees, good jobs and good pay-checks... Money may increase capacity for more children... More demand, more supply will help achieve full employment... The non-accelerating-inflation-rate-of-unemployment... also means price-stability, because of the non- accelerating-inflation-rate, words and meanings... But, when population increases money-supply should increase to keep wages and income atleast constant... If we will try to pay out wages and income from the money-supply in the past period it will reduce money-supply in everybody hands which will also reduce demand because if we assume that more people have joined the workforce, suppliers will supply more. Then supply relative to demand will go up, prices will fall, because now there are more goods and less money, value of money will go up, demand will go up... If this is the conclusion that prices will fall in the future, especially price of capital people will delay investment and less and less investment will put the economy in a downward spiral for a period... Similarly, the fear of higher interest rates soon may push the investor for investment soon... People view lower prices as a disincentive for investment, but they forget that lower prices will help everybody in terms of cost of living... The central-banks job is to match demand and supply of money by maintaining the right level of money-supply to keep demand and employment highest (possible) with prices stability in the economy to achieve highest growth rate to attract more investment and remove supply-side problems because that will make you capital costly because of inflation and high interest rates, again a disincentive... The central-bank has a monopoly over commercial banks to adjust price of capital to suit the economy... Fiscal or Government policy has the same role, price-stability and full employment... The economy has several players including the private sector... No economy can ever be a complete market economy... The US also used to subsidize agriculture not long-back ... Even oil market is restricted to export which has alot of potential now after shale... Lower oil prices will also make incomes in other countries soar and more demand for US exports. According to Keynes-Ramsay-rule economy should choose that capital-labor ratio which maximizes the present consumption in a domestic economy... hope it is true for the external-economy, too... Indirectly he is saying that supply demand as much as you can, means more supply, which also means lower prices or inflation, the law of supply... and Keynes always talked about short-run because he said “in the long-run  we all die”... And, lower prices have a direct relationship with lower interest rate... Keynes was aware of inflation and international trade... But, until Fisher and Wicksell real-interest-rate was not known to many and the central-banks later also tried to manage real variables- real interest rate, real wages... Keynes besides fiscal-policy was well aware of interest rate potential to achieve-full employment, but not in the liquidity trap... In the liquidity trap when nominal interest rate is zero, the banks try to cut down real interest rate by shooting inflation because when inflation will go up and nominal interest rate constant, real-interest rate will go down. Higher inflation will reduce real interest rate. However, reduction in nominal interest rate also reduces real rates. Nominal interest rate is normally cut to increase spending, but again not after the zero lower bound... The Fed understands the significance of real variables in increasing investment but not in increasing private demand... Private demand will increase when prices will go down and real wages increase... The Fed should now not commit inflation but deflation which will increase private demand... I think we are done with the investment and supply side...Now this time for the private demand.... Mothers are doing their best...  

QE without inflation targeting (Europe)...

QE means more money-supply, more demand/supply and growth. But, inflation targeting is making things worse. It means you are committing income and inflation at the same time, because any policy ultimately increases wages and income which creates demand/supply in the economy. But, by committing inflation you are actually cutting real wages. Keynes said that there is nominal-downward-wage-rigidity, but there is always scope to cut-down real-wages by increasing inflation. Blind following of the QE in the US will not get results as long as you are not sure which variables should be affected to achieve full-employment and growth. In general we think that nominal interest-rate decides the level of investment, but, actually, it is real interest rate. Both, real interest rate and real wages also reflect the cost of investment. Not sure what the central-banks are trying to achieve, but they are working against the demand. All their efforts are to help Capitalists by cutting of real interest-rate and real wages to improve supply. But, very low inflation means there is over-supply. It is an oversupply problem due to high inflation and low real interest rate before the recession which has led to lay-offs due to decreased demand relative to supply. Therefore, if ECB wants to increase demand relative to supply and investment is should not commit inflation as it is likely to hurt demand. QE without inflation targeting is likely to help more. People will have more money... 

Euthanasia...

Keynes predicted the euthanasia of the creditor or rentier of the capital because he thought that land and labour are scarce, but capital has no reason to be scarce, because the central-bank can print money to stoke demand/supply to achieve full-employment. In the developed-world the central-banks have pumped so much money in the system that has made money so cheap that pushed interest-rate rock-bottom (Japan, US, Europe). In these countries, capital is cheap and not scare, at all; interest rates are at zero-lower-bound. These economies are very close to that (Keynes’ concept of) euthanasia, when interest rates are almost zero. If we take Japan as an example which is reeling under recession for past two decades and interest-rate near zero, euthanasia of the creditor seems very plausible. In all the three economies interest-rate is near zero and they are also probably in the famous Keynesian liquidity trap in which people accumulate reserves, when nominal interest-rate is zero and cannot fall further and in the expectation of lower prices forth they delay purchases.  Prices reflect scarcity and higher-prices reflect higher scarcity, even prices of labour (wages) and capital (interest-rate). During downturns both are not scarce as there is a cut down on investment and interest-rate (or increase in money-supply) and employment and wages (or increase in unemployment and labour-force).  In an attempt to increase demand and growth, these banks failed to understand the importance of savings which is also a function of real interest-rate (nominal interest rate minus inflation). It has also led to capital-fight. Moreover, in another attempt to make economy competitive we have also cut-down on real-wages (nominal wages minus inflation). The continuous increase in money supply and inflation has kept real-interest-rate-and-wages and demand low. Moreover, slowing population growth rate has also affected demand negatively. The central-banks are trying to push the economy through money-supply which is supposed to increase spending and inflation, but this is even going to hurt demand by lowering real-interest-rate-and-wages and might not work in the liquidity-trap. Savings also do have a positive effect on demand through lower interest rate and higher investment. Moreover, inflation will also lower real-wages. These banks policies might have a negative effect on demand by increasing inflation. The Fed is trying to push prices up which is opposite of the argument that increase in real-wages will also increase demand, the Pigou-Effect.  The effect is also helpful in the liquidity-trap by increasing real wages and demand. Growth-rate of the economy will increase. The Fed should try to release the repressed demand by increasing real-wages and stop inflation targeting and let the prices fall to increase demand. Lower interest rate, as they are, will help increasing investment. The interest rate in these countries might remain very low, probably zero, for an indefinite period of time (may be forever) because in these capital rich countries, capital is not scarce anymore...

Oil-prices and growth in other countries...

The US now has become an oil producing country instead of a big importer of oil like before. It has cut down alot on oil-imports because of increase in the domestic oil production. Nonetheless for a considerable number of times the expansion of the US economy was constrained by oil-price rise because they directly add to the other prices in the economy and stoke inflation, which is tamed by increasing interest rate and reducing demand/supply and employment. Price stability and full-employment are important for a just distribution of income according to product which is the goal of Political-Economy or Economics. Therefore to achieve this objective it is important that oil-prices remain under control. Just like the US lower oil-prices are also important for growth of other countries because of the aforesaid aims. The discovery of the Shale-oil in the US is like a big innovation over oil production. It is extracted from sand and will be helpful in increasing supply of oil to the other countries and lower prices will help demand and employment. But, so far the US has restricted exports of oil from US. It is prohibited. Lower price of oil has also affected production and employment in the US. Oil is now a bigger industry in the country and also creates alot of employment. However, as far as Shale-Oil is concerned its cost of production is higher than normally. But, since it is creating employment with in the economy which has a direct effect on demand for labour, income and growth it should be done and excess should be exported to other countries. Oil prices (few quarters back) were trading near $ 40 and the normal cost of drilling normal oil is around $ 5-10. Therefore, if the cost of production of Shale-Oil is even double, it will be profitable to supply at $ 30 or 40 or 50 or over and increase competition. As we have seen oil-producers manipulate supply to avoid loss, the US can do the same.  Participating in competition is rewarded. Therefore, the oil-production in the US should continue to reduce slack in the labour market. It has a lot of potential to create employment. Only started...Moreover, when it will be exported it will also reduce the limit posed by higher inflation and interest-rate and growth in other economies...     

Stylized facts might show Convergence...

The best way to help the labour is to increase the value of their wages, actually real wages, by reducing inflation and prices overtime. Samuelson states that real-wages should rise in the long-run, one of the stylized-facts. A stylized fact is based on evidences. Nominal-wages are downward rigid which means they do not go down easily because that would cause conflict and friction between capitalists and labour and would be a moral issue. Labourers are poor- people compared to the Capitalists. There is always a tussle between (them) that Capitalist will keep wages low and labour to keep them high. And in this battle labour is paid a raise only as much as inflation has increased which has kept their purchasing-power constant but not increasing. The real wages has remained subdued where they were years ago. It is true that the number of good-things in life has increased but they are still beyond the reach of everyone. This means that there are more goods relative to money in people-hands which makes money scarce than goods cheap. Prices should fall, but this has not happened which means that real wages has gone down means less demand (due to inflation) for the industry itself because prices has increased more than wages that points that the distribution of income is far from equitable. Another stylized-fact is that share of labour and capital would remain constant in the long-run and. Economic policies should aim equitable income distribution according to productivity.