Tenzin’s Response to Liquidity Trap

hi naveen,

wow... you were right.... you did infact predict the future..!!!

well so now that you i know us is eading towards liquidity trap.. and if this happens obviously every other country also is going to suffer...

so what is the solution to this? what should the us or any other country do to safe gaurd themselves??

regards,

Tenzin


My reply…

Hey buddy, don’t pull my leg!!!

It’s not about predicting the future. Anybody who follows the current economical condition with some additional interest in economics can say these things…

The effects are already started to cause the problems for the rest of the world including US. So there is no country, which is isolated from this crisis. Every country is associated with one or the other country. So it’s a ripple effect. We can’t say that we are safe guarded ourselves. We can only minimize the effects!!!

Solutions???

Even though I am not an expert, I am giving some input from what I have read/reading from past economist’s works.

As I posted in my earlier posts like 4 point solutions recently(23rd November)& some other articles which talks about the handling this kind of situation.

In 4 point article I mentioned that RBI should go ahead with reduction in the interest rates on subsequent basis without worrying about inflation. Because in the time of crisis people will not spend, so when there is no demand, then there is no inflation. Even if in worst case demand increases also, then because of low interest rate industry will be in position take the money and cater the required the demand. So money should reach the people’s hands. So it’s all about boosting the sentiments of the people. Which creates rotation of money which leads to productivity & employment will be taken care of automatically.

Now there is a possibility that RBI may reduce the repo & reverse repo & CRR tomorrow or in coming days to boost the rate cuts & in turn economic activities.

But only monetary policy cant work in this kind of situation. Government has to act like CATALYST. Like should start spending more on public activities like infrastructure building, employment creation schemes, export boosting policies, encouraging private investment, reduction in tax rates & etc demand boosting activities. Of course due to this government may run under fiscal deficit for sometime but that cant avoidable.

This what Mr. Manmohan Singh will do tomorrow by announcing the some boosting packages. And this midnight petrol & diesel rates also slashed Rs. 5 & 2. Again that's also good sign.

But government must use these techniques very carefully, since due to money multiplier effect may lead to excessive demand which may lead to inflation in the medium term and even bubbles like housing bubbles in US which started from 2001 where in interest rates were reduced 1% to combat 2001 stock market crash.

Bottom line:

According to me, in economics there are no hard and fast or fixed rules for crisis handling or solution. Depending upon the situation we have to use Monetary, Fiscal, Forex, tax & etc CARDS...

I hope I answered your query Mr. LITTLE TENZIN!!!