Consolidation and Spendings...

This is second-time since the stock-market crash in China tremors in August are felt across the globe and there is a disagreement among the analysts over some fundamental problem in the economy and that is it signalling a longer correction (?) which might put the World in a low demand and growth spiral and INDIA is not an exception. Mainly it is a disagreement about the unemployment in the economy which determines the level of the problem. But from that point of view the economy is doing well because the policy-makers have kept pouring money-supply to achieve full-employment but rising wages are making the economy lose competitiveness which is a bigger headache. Chinese economy is largely an exports oriented economy and much of its growth rate is attributed to its high current account surplus. China is worried about its competitiveness which it is trying to gain by depreciation or devaluation which would trigger depreciation and out flow from emerging markets, including China. Falling exports and devaluation through easing and higher interest rate in the US has resulted in the outflows from emerging markets which has created shocks over the globe when the chain is, my exports are your imports and my imports are your exports. Income in one country is also decided by the income in the other country. China is mingled so well with other countries through trade that a recession in China would slow down everyone. China’s share in world trade is huge. A disturbance in the Chinese exports would affect Chinese people income and imports. China mainly assembles imports into exports and it might slowdown when Chinese exports become uncompetitive because of full-employment and higher wages. Moreover slowing in the working age population is pointed as the economy’s long-run problem. And, more money-supply after full-employment would worsen the situation because the market would compete to attract labour offering higher wages. However, debt situation and over-supply in the housing market also need to be controlled for which tightening is the remedy and not easing. More and more money-supply after full-employment may continue to increase debt and over-supply stoking fears of reinforcing bubble and perpetuate a correction. People may default on their obligations when debt goes over and start selling assets because of fear of loss. Speculation should be checked. The correction would entail falling prices but that would be uncontrolled. Nonetheless, if the fall in the price level has to be controlled then the monetary-policy may tighten in a controlled way. Chinese unemployment is lower than 5-percent and it may increase its competitiveness by tolerating a little higher unemployment and lowering the prices. Higher unemployment might help reduce wage-pressure by reducing some demand but it must be controlled and data dependent. The economy must try to avoid extremes, excessive inflation or excessive deflation. Lower prices also make the exchange rate favourable and would help demand. The central-banks choose between inflation and unemployment as required. Economies in recession are targeting higher inflation delaying the objective of price-stability and over-heating economies with bubble fear might try to tolerate higher unemployment by increasing credit cost, and diffuse the bubbles delaying the full-employment objective. Both lower demand in the economy by increasing inflation and by reducing employment. Unemployment benefits might help contain the necessities.  Trade-cycles are imminent, but the central banks job is to regulate the cycles with consistent interest-rate movements, a credible monetary-policy with control.

It is just a coincidence that China may slowdown at a time when INDIA is expanding which might affect its trade ambitions and growth rate. Recessions are the time for spending and boom is a time to consolidate, might be a good-rule to go forward...