Congress has seen the
fiscal profligacy of Pranab and the resulting inflation and election results...
Food and fuel inflation have been the sources of worry for INDIA, though both
are going through a benign period...
Poor people have a
higher propensity for consumption, which may stoke inflation and interest rate
expectations... and lower investment and increase outflow of capital... We have
evidence of easily overheating in the economy in the case of INDIA...
If the government
borrows money it could also increase interest rate and crowd out private
investment... Increasing productivity through training and skills may also help
increase real wages/incomes, instead of wage spending by the government....
The policymakers are
worried about lower prices or inflation in the US. The prices in the US may
also fall due to rising productivity due to lower borrowing or capital cost,
which might increase real wages/incomes... ORC lower prices would increase
nominal and real wages/incomes near full employment and demand if people do not
expect lower prices or expect higher prices...
Real rates in the US
are near zero or neutral, 2.25 nominal rates and close to 2% inflation, which
needs to be maintained for stability in the market... Low inflation means more
demand and higher price expectations and vice versa...
Stable interest rate
and inflation expectations are important for growth... Lower price and interest
rate expectations might delay demand and spending and increase supply and
higher price and interest rate expectations may delay supply and increase
demand and spending...
We need to balance both
demand and supply to shape prices and growth expectations...
We are experiencing low
inflation in US, which could possibly mean lower demand and higher supply,
which need higher price expectations to increase demand that could be achieved
by a loose monetary policy or neutral interest rate or longer lose policy to
increase demand near full employment or little higher interest rate to curb
some supply and increase price expectations...
The interest rates in
the US are still low compared to the past and developing countries. But, the
problem is that the Fed is either likely to overtighten or undertighten because
lower interest rate further reinforces lower prices through lower borrowing
cost and vice versa...
Government should
promote hedge investment to control risk... Both, lower cost and prices and
higher cost and prices and expectations can benefit businesses if they are
anticipated correctly... Investment at lower prices increases profitability to
sell at higher prices...
Bonds work well during
slowdowns and equities during growth... Businesses and investment needs to know
price and expectations before investment... If you can rightly predict prices,
lower or higher, and act accordingly, any investment would give you better
returns...
Easy money and higher
inflation and financial assets prices and consequently higher interest rate and
expectations are the problems that trigger slowdowns... Low inflation and
interest rates in both, the developed and developing countries point the
capacity to expand further.
Nonetheless, stock
markets could go for bigger correction in the case of a slowdown, which is so
far far given low demand and spending and prices... The biggest problem to the
growth is oil prices, which may feed into inflation and asset prices, including
dollars...
Few years back lower
demand and commodity prices in the global economy had helped INDIA contain the
CAD and inflation, that low global growth was good for INDIA… but due to
increased demand for employment and exports the need is a steady growth in
demand in the other countries, too...
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