A Return to Keynes

I first wrote about the need to adopt Keynesian stimulus spending on June 25, 2008 here at http://www.decisionstats.com/?p=143 instead of just tinkering with monetary rates to curb inflation. I stand both vindicated as well defeated. Vindication because finally the US as well Indian government have accepted the need for stimulus spending to create jobs, inflation being a proxy of them high fuel prices and note the following lines -I wrote them on June 25,2008 .

 

By blindly following Milton Friedman ’s economic monetary policies of money control, the central banks are ignoring the fundamentals of the current crisis in which essential commodities are having increased prices, and growth is threated by global and financial market failures. Ironically these are conditions that have taken place almost 79 years ago in the macro economic event called Great Depression.

 

So why the defeat .Well it is one thing to accurately  predict macro economic stress , and another to be affected by it. With nearly 6.7 % un-employment and another 12-14 % under employment ( people who have stopped looking for work or are forced to be part time workers ), thats almost one in every five American adult who is not able to contribute productively. No wonder almost one in every ten households is in mortgage default, almost assuming two earning members per household on the average. As a data consultant primarily focused on the North American market I have lot more data but lesser pipeline of clients to look for.

 

Layoffs give individual firms temporary cash flow relief but that relief is temporary as it overall reduces the capacity of the economy to absorb goods and services. Thus reduced supplies are almost inevitably followed by reduced demand ( note the latest retail and automobile sales numbers).Indeed tax policies should be tweaked to give latoff aggressive companies lesser benefit than conservative companies- as the government loses revenue from the missing income taxes.

 

In India, the central bank has again stuck to more of monetary policy and less stimulus relief despite the presence of large foreign exchange reserves ( which have grown almsot 20 % in value thanks to the rupee depreciating against the dollar).Thus it is not surprising that banks have frozen lending to automobiles and continue with higher rates as they stick to higher deposit rates and cautious ALM policies.

The projected growth of Indian GDP at 6.5 % is much lower than 8-9 % earlier and is likely to be even lesser.

The brighter side- the new US administration seems aware of the challenge. Unlike other superpowers in history the United States might be the only one whose economic boom is almost always shared among nations ( Europe after World War 2) and later on Asia thanks to offshoring.With job creation and spending as priority sectors this returns the US economy to Keynesian spending ( though it is marketed as being similar to the Replublican President EisenHower’s highway initiative to get more Bi-Partisan support)

And India is having elections next year which in the wake of terror attacks and an angry public might lead to higher turnout especially among the literate and urban masses and greater responsiveness .

Another surprise could be the technology sector as this sector has sprung more innovation than anyone. As more and more people start startups particularly in Bangalore , and lesser VC money to choose from – online B2C sales could also be booming thanks to lower costs in aggregated supply management.

 

Disclaimer- These are my personal views.

Apologies for the typos- my 1 yr old son broke the keyboard and some keys were missing the placeholders.

Author: Ajay Ohri

http://about.me/ajayohri

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