Rajan worries about competition for competitive-devaluation...

Recently Raghuram Rajan has created headlines by saying that the world is moving in the problems of the Great-Depression (1930s) as there is lack of coordination between the world’s central-banks in a run to achieve employment and growth through competitive-devaluation same like before when the (now) industrialised countries, back then in 30s, abandoned gold-standard and adopted the same technique to give exports a thrust... which actually helped the countries to come-out depression and did not accentuate it... The withdrawal from the gold-standard made a case to devalue your currency and it helped the countries to reduce unemployment and increase growth, and achieve recovery...  Exports have been the main source of growth for many economies... Rajan this time looks more concerned for the problems the easing-programmes are creating around the world in the emerging-markets... about off-shore capital flows and volatility which was very low back in the thirties, but definitely helped exports... Even the recovery which the US saw during the Great-Recession was preceded by increase in exports... In INDIA too exports shot-up when the Fed started taper-talks in 2013 and the foreign-capital was moving-out... Competitive-devaluation and easing becomes a headache when everybody tries to devalue at the same-time and there is a competition to devalue, and it is a gain to nobody... Competitive-devaluation is also achieved by more money-supply, same like lower interest-rate, but as we know more money-supply is also likely to inflate bubbles in a supply-constrained emerging economy and is not always desirable... However, the trend in the developed countries has been that inflation has gone down as supply-side has improved... For the developed-industrialized-world falling prices or deflation is a problem and not inflation like the emerging world, and the monetary-easing is not increasing prices internally too much and helping exports, but lower interest-rate is responsible for capital-flight which is producing volatility in the emerging-markets where supply-side is still a problem and might create bubbles when there is a divergence between the nominal and real-prices of assets which may go down when inflation will go down with higher interest-rate or the bubble-bursts and push the economy in recession or down-cycle... Full-employment is the limit for monetary-easing and probably even for competitive-devaluation after which it will constrain resources and produce inflation which (is right) should be tightened or otherwise someday the bubble will burst and will increase unemployment if supply-side outstrips demand... People will demand less... Full-employment should also be a guiding principle for devaluation... In a country close to full-employment more money-easing will increase inflation, wages and prices, which is actually bad for competitiveness and exports...  

Long-bonds may not be long...

Indian government has planned to bring 30 year bonds at much higher-rates than the rest of the world... Bonds are frequently traded by the central-banks and commercial-banks to change short-run interest-rates, as the Federal Reserve of the US was buying-in bonds to increase liquidity or money-supply that reduces (relative) investment demand and reduce interest-rate, when either demand is down or supply is up interest-rate goes down... More money-supply increases the ability of commercial banks to lend more and they try to cash the scale.... Nevertheless, bond interest-rate and bond prices are inversely related... Bonds may look long-term, but it is bought or sold frequently in the market... When you sell bonds they fetch you money, calculated as per interest-yields and bond-prices, too... Bond-prices and interest-rate also change with inflation and expectations... Banks are smarter than ordinary people to invest in bonds in big amounts... It is more popular among banks than the ordinary public because its value is more protected by inflation and price-rise, because when interest-rate on bonds goes down bond-price goes up and when interest-rate goes up bonds prices go down which compensates to the loss in the value of investment due to inflation... One of them will increase... Even when bond-interest is zero bond-prices may increase... And, this may sound good to an intelligent investor like banks than to the common people... But, as we have seen above, bonds are traded by central-banks to change short-run rates and thus bond prices... It is true that bonds are profitable investment, but no one actually knows what long-run rate and prices will be, because you may be enticed to sell it early than you expect, either bond interest-rate will help or prices... In the developed-world interest-rates have gone down in the long-run and bonds are trading very low... When you once surrender bonds you lose your long-run claim and it may not be available in the market again... It may look long-run, but we have to go through short-runs and, changes in expectations and condition of the economy...      

Trade-liberalization after full-employment will help...

INDIA in 2015 became the fastest growing economy in the world after China after change in the methodology for calculating real-gross domestic-product, but its high inflation (due to supply-side problems and slow trade-liberalization) and high nominal interest rate has put brakes on demand-supply, employment and achieving potential economic growth-rate... Higher growth-rate is important for higher demand, investment, and profits/wages with price-stability and full-employment. Monetary-policy is a supply-side tool, but it also increases demand in the economy by the way of increasing employment, but, again not after full-employment... Full-employment means we have reached our limits and there is a scarcity of labour within the economy, and supply cannot be increased with domestic labour and prices or inflation start rising... This can be called the labour supply-side problems with structural-factors like education, skills and productivity... In this situation if we want demand-supply and growth without increasing inflation we need external supplies or the international-trade without which the economy will only feel overheating and loss in the value of money and demand... External sector is as important as the domestic sector in fulfilling demand, increasing welfare and achieving higher-growth rate... If trade-liberalization does not reduce domestic employment and help lower prices and interest rates, it should be promoted, because that might eventually help us achieve full-employment and full growth... The point is that if we have achieved full-employment, trade-liberalization will also help achieve price-stability... More supply and lower prices are important for lower interest-rate, high investment and high economic-growth...  

QTM Version 2.0...

The Quantity-theory-of-money (QTM) has had been the holy-grail of economics for more than a century and is said to have a link with the Albert Einstein’s famous e = mc²...

...because both have connections with a mass and a velocity of something...  The equation of the quantity theory, MV =PT, also has mass or quantity of money (M) and velocity of circulation of money (V) which decides the level of inflation (P), and, real prices of goods and services in the economy (T) or nominal prices (N). Or we can also write it as MV = N, where the nominal-level of prices equals real-prices multiplied by inflation, which says mass of money and its velocity decide the level of prices in the economy... The same quantity-theory of money explains that money-supply decides the level of inflation and interest-rate in the economy. The interest rate or price of capital remains the most important price for the economy’s growth rate. There are many types of interest rate, but economists mostly view real-interest, nominal interest rate minus inflation, as more significant in deciding the level of investment and growth. However, ordinary public regard nominal or market interest rate, vital for spending. But, indeed, there is a difference between nominal and real interest rate, and if you want the real picture, real interest rate reflects the real-gain or real-sacrifice for the public. The majority does not know about it and everybody is not an economist. It is a kind information-asymmetry between economists and the general-public, but still important for agent’s actions and the outcomes... Nonetheless, money-supply and interest-rate has a direct effect on demand and supply to achieve full employment and higher economic-growth with increase in the value of money and not just price-stability, because increase in the value of money or deflation could help increase demand, which in the future might increase inflation and interest rate to cross the liquidity-trap visible in the developed-world. In the liquidity-trap interest-rates remains close to zero for a long-period of time due to low prices. In the developed world, our recent study shows, that despite so massive increase in the supply-of-money prices have shown a downward-slide, especially price of capital which should otherwise increase in case of a valid quantity theory of money. Prices or expectations of changes in it have a direct effect on the economic-growth. In other words, prices play an important role in economic-growth, and lower prices are more expansionary because it increases demand (Tobin). It may also be called law of prices. But, it works with both demand and supply. When prices fall demand increases and when they rise supply increases. It is expansionary both ways, but more expansionary downwards. And, we know well that lower price of capital or interest-rate is also expansionary in terms of investment and demand-supply, and economic-growth. In almost all the prior models a higher money-supply and higher savings result in lower interest rate which is very important for investment and economic expansion.  In the recent version of the quantity-theory-of-money, prices decrease and not increase when the monetary-volume increases. The central banks are trying to increase the money-base and reduce interest rate or price of capital, just reverse of the Fisher’s equation of exchange (MV = PT) that more money-supply would increase inflation and interest-rate. Under the new circumstances the quantity-theory-money and the equation of exchange do not hold the same conclusions as before. Since, in the new version increase in the quantity of money is likely to reduce price-level with low level of interest-rate. Increase in the monetary-base would reduce price or cost of capital and the general price-level. The long held opinion that increase in money-supply reduces the value of money (because of inflation) might not be true under the present case, because more money-supply is likely to reduce interest cost of production, which also increases supply and more supply may reduce the price-level, the law of supply. But, when demand is deficient more supply could reduce the price-level, and, the economy would fall in lower prices and interest rate, and probably will push economy in the liquidity trap. The central-banks are increasing money-supply, lowering interest-rate, increasing supply and also targeting inflation, which might not work because supply-side is improving, but excess of labour-supply and low wage growth may be responsible for weak-demand. Inflation-targeting could increase prices or inflation which might hurt real-wages and demand. The banks might try to reduce unemployment by increasing money and reducing interest-rate or cost of capital, but when cost is going down how inflation would pick. Inflation would increase when labour becomes scarce and demand higher wages to switch to other profitable locations. Higher money-supply and lower interest-rate also point that capital is not scarce, but after full-employment labour becomes scarce and might demand more wages which may also result in higher demand, inflation, interest-rate, and possibly exit from the liquidity-trap. Nevertheless, the results of the equation of exchange of the quantity theory of money have changed in the past few decades. Moreover scientists still use Newton’s method to launch rockets instead of Einstein which also might change in effects and interpretations...