To inflate or to deflate…

Damned if you do and damned if you don’t, spend money that is.

I bet there are many heads of government sitting across their finance advisors these days asking this question, “So, are you asking me to cut spending or increase it?” And I can bet that they do not get a clear answer. I bet that their answer goes something like this, “well, if you…then…,  and if you….”

Its like this: if the governments spend money on great public works or whatever, they will be doing some good. They will be providing employment, they will be putting money in the economy, they will be supporting businesses (both by buying goods and services for these great works and the salaries of their new staff who can now buy their goodies), and they will be earning taxes. The wheel goes round and round.

Sounds good, why don’t they do it? What’s the problem then? Here is the biggie: where does the money come from? Most governments too have debts (budget deficits), they do not have the money to spend. Can they not borrow? Of course they can, but where are the big banks that used to lend them money – oh yes, I remember – being rescued by the governments!

There is no money. Its not as if the government can just print more money!?…???..Can they? Yes they can. But should they do that knowing that if you have too much money chasing the same production/goods, then the prices will surely rise. That is inflationary. Which of course will take us right back to the begining of the problem.

Okay, so we do not like the spend money (inflationary) idea. How about what the other guys are saying – cut costs. All of us know we are in this mess only because we spent too much when we did not have the money. Fine, sorry. Lets change that now and cut spending.

Wish we could do that – but now that is even more dangerous. With all the job losses, there just isn’t enough money to keep the wheels turning. If the government cuts their own spending, and encourages others to do the same, there will be even more businesses in trouble and more job losses.  Recession.

How about a bit of this and a bit of that?  Do a bit of the support prices thing, and a bit of the cost cutting thing. Spend a bit, give businesses a boost, then when that is done, then work on the inflation. Can that be done? I think, that is what will have to be done eventually. But how it will be done is a very tough question.

Too much of or too many swings in the markets will only confuse everybody. The press will support the hue and cry, the stock markets will be confused and will tumble again, the consumers will start hoarding and businesses will not know whether they are coming or going.

This is a very tricky situation. I would feel sorry for the people in charge of governments if I was not so angry with them. They are responsible for a car with punctured wheels – if they inflate too much, the tyres could explode; if they allow too much deflation, then we wobble and cannot move on. Unforunately, they do not have a good reat time gauge to measure our sustainable well being, so they really cannot know whether their actions are doing some good or harm. But they have to try.

Take it to a garage, you say? Where are the experts? Don’t they have the answers. In theory they do. Among the many answers, there is one called reflation, and they can talk for hours about it and its nuances. It is a very useful framework, and the real test of it is now – when you have to actually do it. Its easy to say it, far tougher to show and do.

This is a game of skill, finesse and timing.  And our livelihoods are at stake.

 

 

(c) meetasengupta

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One response to “To inflate or to deflate…

  1. Smita Purushottam

    Hi, excellent analysis, but despite the pain, I think the world was living beyond its means and destroying the environment in the process. Cannot everyone agree to go Green, lean and mean – is cutting consumption such a sin when it is catering to non-existent, artifical needs created soleyl because of slick advertising? Shouldnt someone find a new model for healthy growth?

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