Formalisation, Central Banks and Expansion, and Arabs...

There is no connect between formalisation and wages... Even with the Unions in developed countries wages are lagging productivity…Formalisation basically means more data and information on the economy to frame consistent policies… Low skills and productivity are reasons behind jobs and joblessness and lower wages… Formalisation also lowers tax evasion by maintaining accounts…

The central banks or the RBI are to curb irrational exuberance and excesses and try to control too much volatility in prices in the stocks and the broader economy, but not all the prices... Price change and expectations play an important role in investment or speculation...

Lower prices or inflation increase demand and price expectations and higher prices lower demand and price expectations...People buy low and sell high in the expectation of higher prices and higher price increase supply and lower demand and price expectations...

The same is with inflation people try to gain from rational expectations... But, too much volatility in G&S prices might increase change in the interest rate and expectations and demand and spending and growth worsening financial and economic stability... Irrational exuberance creates booms and busts, the central bank must curb too much boom and busts…

Depreciation is a failed strategy because it lowers domestic demand... competitiveness could also be increased by lower borrowing cost and increased capital productivity which could also increase domestic demand... Lower oil and inflation is one of the reasons of strong rupee which means higher real exchange rate, more demand for domestic products...

2.5% nominal interest rate and 2% inflation mean a 0.5% real interest rate which is likely to increase savings and lower spending even when inflation is tamed resulting in lower price and interest rate expectations... During the last recession the Fed has already tried negative real interest rate when nominal rates were close to zero and inflation below target...

The healthy balance sheet maintenance could work as precautionary money during the next recession... Too much tightening could lower price and interest rate expectations leading to a slowdown...

The expected inverted yield curve as a precedent for recession in the US is exaggerated since this time the Fed is more cautious about its past mistakes of too much tightening and defaults and higher unemployment and lower prices and interest rate, later...

This time it has recognised that there is a neutral real interest rate at which there is price stability and full employment and it admits, now, that we have reached the neutral real rates or zero real interest rate at which prices and inflation are stable near full employment...

Nonetheless, labourforce participation rate has been low compared to a decade ago, before the Recession 2008, which might be increased by increasing real wages and if the Fed waits for wage build up when inflation and expectations are low....

Nevertheless, there has been a gap in productivity and real wages since 1970s... By delaying the rate hikes with respect to inflation the Fed has lengthened the expansion... Things move slowly in the economic world, the next slowdown is expected when higher real wages increase demand and price and real interest rate expectations...

…it might still take 3 - 5 years depending on the speed of increase in real wages... lower inflation also means higher real investment and profits...

Higher productivity and lower wages and natural real interest rate since 1970s could be responsible for lower inflation and expectations... Data shows that inflation has increased with rate hikes since 2015... Low inflation and expectations have lowered premium on long term interest rates... Nonetheless, if inflation and expectations increase it could again increase long term rates...

                                                                   Interest rate          

                                                                   Inflation

Withdrawing accommodation and raising interest rate are like taking away money from people and supplying loans and consumption/investment spending, actually backed by banks reserves, even when it has not created inflation and inflated assets, but rolling back money supply and increasing interest rate might lower demand/supply and price and growth expectations...

The Fed should never increase interest rates so much that it increases chances of default and slowdown in the economy even when inflation is muted which might lower price expectations and delay in economic activity...

The stand-off between the US and China is also a major cause of further slowdown in already slow European economies... Germany, the best performing economy in the Euro-area has considerable trade with China which might sour investments...

We have reached a state where no economy can claim insulated from foreign trade and investment and grow in isolation... Even the US growth has slowed down since the inception of trade and tariff war...

Arabs said they want oil at $70… even with supply cuts, but what would happen when the sanctions on Iran and Venezuela would be removed altogether? Prices might fall like the house of cards... Both are among the biggest oil producers... Shale would also suffer along with Arabs...It is just a matter of politics...