Dr. Krugman

In response to,

http://krugman.blogs.nytimes.com/2010/11/18/debt-deleveraging-and-the-liquidity-trap/

Dr. Kn.,

Deleveraging shock is quite understandable and is close to the situation, we are in. Advocating fiscal policy to offset liquidity-tarp and reduction in private spending is a common Keynesian solution. The problem is how we are going to finance this spending? The Government is already running a budget deficit. It is already in debt. I think which why they say debt is no solution to debt. But, i agree there is a difference between a Government debt and a private debt, same as public and private, and Government has ways to finance its expenditure. What are those ways?

As far as deflation is concerned, it sets in when aggregate supply exceeds aggregate demand. If that is the situation can we expect that there is an excess of supply of goods in the economy as a result of very low interest rates in the pre-recession period? And, are the businesses are waiting to let the excess stock finish so that they can resume their spending later? Do not we need a policy, like increasing minimum income (wages/salaries), here?

No doubt deficient demand, either because of deleveraging shock or because of high unemployment, is the real problem.

The model, though suggests fiscal policy to escalate demand, it is mute on the account of softening the deleveraging shock. Can’t we extend the loan repayment time to protect the economy against stagnant demand? Like the same as the Federal Reserves unconventional move to purchase bonds and reduce long-term interest rate.

Let US be Hopeful !!!!

The issues endangering the present economic recovery of the United States also raise serious questions about the way policy-makers conducted their policies in the pre-crisis. And, the most important question is that what objectives the Federal Reserve had in its mind when it decided to not to intervene in a situation when home loans were distributed so cheap, that landed the economy in a recession that has made its own core policies so ineffective that the Federal Reserve lost the control of the economy? Or, the Federal had some other objectives in its mind, like it wanted everybody to have a home? (in best spirits…)Or, Political-Economy?

We know that a Central-bank is entrusted with the task of minimizing inflation and maximizing employment. But recently I read somewhere that unemployment is not its concern and rather it should concentrate on price-stability. I think he was a politician, some Republican. So does he mean that unemployment is a Governments’ concern. By the way it is around 9.5, up by 5 percentage points. Why it should be at 5 percent? ? Keynes said “equilibrium is established with employment at 95% because other 5 percent is busy in swapping between jobs”. He must have a plan, especially for employment. Because, Americans need a plan. He was opposing QE2 and was expecting inflation, later. I mean later. I found this on the web,

                                                



Data Source: US Bureau of Labor Statistics CPI-U
FOR CENTRAL BANK:
It did not respond to the rising inflation between Oct-Nov 2006 to Oct-Nov 2008. A period in which inflation rose from 1.3-1.4 to 5.6 percent. Two years and 4 percent

FOR THE THEN GOVERNMENT
Then Republicans were in power. Even they did not realize.

HOPE
Inflation is an indicator of the level of economic activity and thereby employment. Every time economy adds people in its workforce it generates additional income and this increase finds space in markets and generates demand, and drive up prices. Sometimes there is a capacity and prices do not respond, good for Growth and Employment………….

That is why i thought HE must have a solution.

Indian Policies are Aiming in Different Directions...

The Central Banks effort to contain inflation which stands at 12.30 percent is not consistent with the policy in the foreign exchange market which does not show any such commitment towards inflation; neither has it showed any commitment to the deficit in the Balance of Payment situation by not responding to a strengthening Rupee. The pour of foreign capital in Indian economy as a result of quantitative easing, by the US’ apex bank has reduced long term interest rates and has decided to buy bonds worth $600 billion has made INDIA a hot place for foreign investors where interest rates are higher as compared to the US.

Both the policies – foreign-exchange policy and domestic monetary policy – are aiming in different directions. The domestic monetary policy is aiming at inflation by increasing interest rates and curbing investment, and the foreign exchange policy is of the type of promoting investment by not doing anything, not even a bit, as if they are handling two different economies.

This is going to retard the BOP situation, too. A rising rupee will increase the purchasing power of the importer and he is going to import more. The same, i mean a bad thing, is going to happen with exports it will make the Indian products costlier, abroad, which mean a diminished demand for our products.

Domestic policy and foreign policy should be tailored to work for a common goal and these goals have best found their places in the famous Philips’ Curve which is said to be the starting point of the modern macro-economic thinking. The Philips’ curve tells us that growth rates of an economy are nothing but the result of a trade-off between inflation and employment, and, the Central Bank moves interest rates up and down to decide between inflation and employment. When inflation is too high the central bank chooses to increase interest rates and when inflation is low it decides for lower interest rate. In this way it affects the total availability of goods and services in the economy which has a direct bearing on the welfare objects, an economy entails. Their availability increases welfare and vice versa. Economics says the competition between sellers to sell their products results in reduced prices. Availability of goods and services reduces the upward pressure on prices to rise. But, this welfare has limitations because as availability increases it increases employment of labor and scarce resources. As a result income in the economy as a whole increase and the demand for goods and services increase simultaneously, but, if the stock of goods and services do not support the level of demand it results in higher prices or inflation.

Inflow of Dollar in Indian Economy means increased demand of Rupee to give better returns on investment. Here, institutional arrangement to invest in Indian economy and Rupee is worth noting. If investors buy Rupee in foreign-exchange-market, that would increase the demand of Rupee and would drive exchange rate for Rupee up. In the process, Dollar is going in and Rupee is coming out the stock of reserves maintained by financial institutions. Finally, it is increasing the money supply available to the Indian- Economy for investment and is going to hurt the arrangements by the Central-Bank to contain inflation which is already above the normal target level by 7 percent, which should be around 5-6 percent.

Nobody accepts Dollars at our Indian shops but institutions like banks do, and in some cases individuals, too. Currency speculation in the recent times has highlighted shortcomings of the foreign exchange market and foreign currencies, now, are a part of our investment portfolios. Here, Dollar does not pose to be a lucrative option, in the short-run, because of a declining trend due to quantitative easing and depreciation in Dollars’ value. Quantitative-Easing will be done in several rounds to materialize the object the US policy makers have in mind – inflation and un/employment at targeted levels. But, for those who had expected such a move would have bet on the emerging market currencies and must have benefited themselves.

The main argument is that the domestic and foreign exchange policies are not in line with the macro-economic object of low and stable inflation. When we look at other emerging economies like Brazil, and our immediate neighbor China they look much concerned with the rising inflation even-though the inflation rate in China is at a comfortable level of 3 percent. When inflation is higher than the targeted-level the Central Banks is required to raise interest rates although it affects the real-economy, which reduces investment and the total availability of goods and services, and thereby welfare.

Structural reforms, like the one talked about retail, rather than continuously increasing interest rate is the real solution for the inflation India is facing to increase the welfare of the economy. The strategy to not to buy Dollars so as to reduce the upward pressure on the Rupee to rise, a strategy to increase exports and decrease imports, is welcome because that would increase investment in the export sector of the economy and will add to the same problem of employment, income, demand, and, at last, inflation. But, at least, we can levy some kind of tax to reduce the quantity of money flowing inside the economy. After all, it is, ultimately adding to the total quantity of money available for investment and the Central Bank, in the form of higher interest rate, is constantly giving us the message that we need to curb inflation. Moreover, it will also restrict the upward pressure on the Rupee to make exports costlier and imports cheaper because of increasing purchasing power of money on the international front.

Let us be Hopeful !!!!!!!

Beware of Quick Money

Read
Stiglitz: India Could Lose in Capital Controls Race,
at,
http://blogs.wsj.com/indiarealtime/2010/11/11/stiglitz-india-could-lose-in-capital-controls-race/

I've mentioned it before,
http://kshaaleen.blogspot.com/2010/07/globalization-good-servant-but-bad.html

MILTON FRIEDMAN'S SURPRISING SECRET....

It's very nice...
MILTON FRIEDMAN'S SURPRISING SECRET

http://www.boston.com/globe/search/stories/nobel/1992/1992n.html

The World We Live in...

Have a look on the link below,

'Krugman living in parallel universe'

The purpose here is not to defend either Krugman or Ferguson but to keep away the looming threat of a longer recession in the mind of the people that the Government is not much constrained to put the economy back on it usual track- higher employment. The call for a Balanced Budget which became imbalanced due to higher consumption in the past periods at a time when people are reluctant to show what they have got for the economy –consumption or savings- due to the insecurity they feel about the condition of the economy is averse to the common knowledge in which investment, government and/or non-government, and production rise to increase the level of employment. Here, the multipliers, employment and investment, work to result in higher employment and investment, and a higher rate of growth. The inflexible attitude of fine tuning the economy’s budget and advocating a balanced-budget at a time when people, market and the Government all are resource crunched and money supply took the route of international trade and exchange markets instead of domestic markets will be like cutting the branches on which your sitting at the moment. Fiscal consolidation not aimed at improving economy’s health and only for improving balance sheets is not a good idea. We should not forget that the US’ social safety nets like unemployment benefit have only saved it so far, whatever little. The purpose of any economic system is not to make living conditions of its in-habitants worse rather it aims at improving them.

Although America pursued an aggressive monetary policy in the past but I do not think its purpose was to create a Great-Recession. Actually, recessions and depressions are general features of a capitalist economy and the US is no exception. This is happening since the Great- Depression, we can easily see the US falling in recessions every 5-10 years since 1930s. We live in a diplomatic WORLD and things are not as straight as they appear and every country has the right to make choices that increase the well being of its people, even if it is in the form of lower prices. Prices rise and fall in the US every 5 years; they are neither increasing continuously nor decreasing continuously. The reasons may be political, you can not deny, but since the US is a big importer too, its actions affect international prices, they rise and fall, too. America has never been a colonial power but its policies, not only the recent, throughout its history have been around scarce resources like oil. When recession broke prices, especially oil, went down and it helped all the oil importing countries because oil prices fell globally. The only thing that goes against America is the way loans were distributed. They were full of short-comings and were below the standard lending practices.

In case of monetary expansion in the US there is not much to do since interest rates are already near zero. The alternative left to the US is to set higher inflation targets and print some currency to fund production activities, public or private, in order to boost employment and demand. And, the decline of Gold-Standard makes a case for such an action. Countries have resorted to policies like increasing income to have a hold on scarce resources in face of rising inflation and a currency redenomination, later. Thus, if the US chooses to inflate its market by printing currency it does not seem to be a bad idea. Moreover, the US can also decide to pay its debt with the same money. It has happened before. But one problem may arise, after all, increase in imports. How the US is going to handle deterioration in its balance of payments situation?? Nationalism instead of protectionism may help here. BUY AMERICAN!!! Or the US can invite China to make investment in America especially in manufacturing following Paul Krugman’s 1991 paper, “Increasing returns and Economic Geography”, if demand tends to be larger in the US. It will benefit both the countries in terms of foreign exchange, transport- cost, investment, and un/employment.

As far as structural unemployment is concerned it is more due to the cost cutting behavior of the firms. Firms are on a hunt to find multi-skilled people so that they have to pay less in face of recession for the same services by consuming same amount of labor. Nevertheless firms will always try to maximize their returns on investment. Is it really a problem? Very recent in discussion...

Let us be hopefull!!!!!!!!!!

With or With-out Gold Standard...

Actually, the point is not so much about gold standard or dollar standard, in international trade, or simply money in local markets. The point is keeping the value of denomination intact………, i will complete it later. Being a Ricardian, and a follower of many more, but as a student of economics i would like to share what Ricardo said about the discipline. He said the subject-matter of Economics is to explain re/distribution of income. Skewed or un-skewed, i do not know. But statisticians like un-skewed and symmetrical graphs, a figure following other and a point following other. Therefore, completing the above line, the point is keeping the value of denomination intact so that the distribution of income according to ones ability becomes less skewed and faster. It does not matter that the population has figures like $1 billion or $1 a day. But we are all constrained by the working-hours a day regardless of our ability to satisfy the demands.

If the value of denomination keeps changing it will take more time to distribute the fruits of hard work evenly. And, this is what happens with money due to inflation. What inflation does is that it reduces the value of money if income does not rise in the same magnitude. One stand on inflation says that it helps distribution of income but we rarely find examples where income increases simultaneously to offset the effect of inflation and if it does happen it happens later, and that’s a circle, vicious or not hard to say. I think it vicious. And, we end from where we start.

The question is why Central-Banks increase money supply if it devalues money? The rule that follows here is, if the supply increases, it will devalue the asset, be it gold or dollar or rupee. The question regarding the current recession is that, where did all the dollar go if it did not reach the banks again? The thing that happened during the Great-Depression and in Japan in 1990s, happened again in American recession and, the result has been liquidity-trap, in all the three instances. What the liquidity-trap does is that it increases the asset demand for money and people, since interest-rate on deposits due to low economic activity becomes zero, keep money as an asset rather than a means to assets. Precisely, the incentive to save and invest becomes zero. People in this kind of situation, liquidity trap and low inflation, either expect that prices will fall further or interest rate will increase in future, and then they will use their reserves to get benefit from the situation. But in the face of this kind affairs for a considerable period of time when inflation do not fall further people do not find it worth while to keep money for purchases later and start purchasing or they wait for interest rates to increase so that they deposit money in banks and earn interest income. There is one more concern and that is security of the money. Nobody keeps large amount of money at his home due to the threat of theft.

The implication of this kind of affairs is also worth noting. If people start purchasing it will directly add to inflation and if they start depositing money it will indirectly add to inflation through the purchase of consumer durables later. Therefore inflation is inevitable in the process of growth and development. And, then there are others who just save and deposit for increasing scores, their consumption is stagnated, but they are crucial from the point of investment. But investment without anticipating demand is not possible. Therefore, in the chain of profit and growth generation demand comes first. But in money economy money supply or purchasing power constitutes the demand. Now can we say that supply creates demand?