Keynes and Milton
Friedman were aware that a zero nominal interest rate, but a positive real
interest rate due to full supply and little deflation would help increase
(wages and incomes; Pigou's theory of real balances and Keynes theory of
effective demand) and savings and investment demand employment and growth in
the economy... Keynes hypothesis of the euthanasia of rent on capital is
similar to that concept of the optimal monetary policy... We also have a Neo
Classical Synthesis (NCS) theory, a mix of Keynes and Classicals....
When the Fed increases
interest rate or interest tax on the economy it affects everybody in the same
way, lower demand, but it also reduces supply and lower production which
increase price and price expectations which means further rate hikes and hike
expectations... which could aggravate the problem of trade cycles and the knife
edge problem as put by Solow... Any deviation from the long run a higher real
interest rate and savings and zero nominal interest rate and higher supply and
lower prices would be self fulfilling and would produce trade cycles and would
result in booms and busts...
Similarly, tax and
tariffs too reduce demand of the whole economy.... and divert resources from
the market... Nonetheless, where and when the market is not efficient it needs
direction through incentives, inducements and stimuli...
Inflation, similarly,
too reduces demand and savings which would drive the system away from the long
run higher growth trajectory...
Inflation and inflation
expectations theory is not supported by the evidences... The popular one is
Japan... and low rates in the US and Europe There has been a consistent
downward pressure on the prices, due to lower borrowing cost and higher supply,
domestic and foreign....
The situation in INDIA
and the US is quite different and the former too has raised import duty on
several items, but unemployment in INDIA would let employ more people by the
domestic steel producers and increase production and lower the prices,
nonetheless the US is close to full employment which could increase wage cost
and inflation, too, apart from higher tariff on imported steel which would also
be less in quantity compared to the past...
The time is not right
for the US....
At this time it is more
important to increase productivity and real wages to increase demand supply and
growth.... And, higher imports or supply might help reduce domestic price level
and increase productivity...
And, competitiveness...
The whole recession
passed and the US never tried to contain trade deficit by increasing tariffs,
however it tried to achieve depreciation which did not materialize due to low
domestic inflation...
Notwithstanding, if
Trump really wants to do favour to the US people... he must impart them with
good education and skills... The US has been dependent on immigration of
skilled labour...
If Trump is trying to
increase prices for the Capital and lower real interest rate that is a myth,
coz that would reduce real return on money and demand.........
Why Trump fear trade
deficits when they are settled in dollars... The only problem with the Trump
policies is that they have a bad timing when the economy is close to full
employment and money supply through tax cuts and spending would increase
inflation and inflation expectations and nominal interest rate hike and
expectations, and lower real interest rate and expectations and lower real
wages and expectations and more dollars in exchange... The US would have to
give more in nominal dollars, but would also increase real domestic goods
exchange... unnecessarily...
Simply, import tariff
on steel would make the domestic economy expensive and uncompetitive... Higher
tariff on imports also means that US would pay more....
Why Trump wants to pay
more.........,?
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