A few days ago I penned a tweet on money flow, economic systems and how they collapsed in erstwhile U.S.S.R when it broke up.
Today I write on how we are facing a different predicament of "Demand Collapse" due to #COVID2019. (1/n)
Today I write on how we are facing a different predicament of "Demand Collapse" due to #COVID2019. (1/n)
When such worldwide catastrophic events happen, people anticipate tectonic shifts in money flow and scared by that prospect they withdraw all their investments/spendings, in effect triggering a self-fulfilling cycle of events.(2/n)
Once people start sitting on cash, refusing to spend/invests businesses see a sales dip. Anticipating that sales dip, lack of demand they in turn put off expansion plans, freeze hiring/begin layoffs. This feeds into the "doom-gloom" scenario. (3/n)
So, what is the way out of this rapid downward spiral. As US Federal Reserve showed us during the Subprime crisis of 2008, the best thing to do during such crises is to up government spending. In effect follow a path of fiscal profligacy or government spending! (4/n)
Government spending spikes the employment/ investments which in turn leaves more money in the hands of people, who are then able to spend more, thereby providing more incentives to businesses for expansion, increased production and more hirings. Thus reversing the cycle. (5/n)
When banks have more funds lying with them. They reduce borrowing and saving rates, thereby promoting businesses to take more loans for expansion, as the cost of capital goes down. This also prompts savers to spend more. (6/n)
Ofcourse the economy can overheat and inflation spiral in such situations, so typically the move should be to first provide more money to stabilize demand, employment. Once these are stabilized then start the policy of gradual inflation targeting and fiscal prudence. (7/n)
Luckily in our case, the current RBI governor has suggested the same. People like us hope that finmin and pmo both heed the advice to abandon fiscal prudence at least for this fiscal year 2020-21, and resume it from next fiscal at the earliest. (8/n)
Through this thread I hope to impinge on folks the issues staring at us economically and how in the interest of general welfare and growth, one should continue with some version of our normal spending habits. Coz after all, India is an internal consumption engine! (9/n)
If inflation in moderation, is a measure of demand, then this is what is happening to it and by extension to demand, across the world currently!
theguardian.com/business/2020/…
theguardian.com/business/2020/…
