Today while I am writing it, I am reading the news of the spread of Corona coming under control in Maharashtra. The number of patients cured is more than the number of new patients. So now, the most significant challenge will be with the economy.
Recently we have been listening to the world Great depression again and again. So I am going to start by explaining a little bit about it.
The Great Depression was a severe worldwide economic depression that took place mostly during the 1930s, beginning in the United States. The timing of the Great Depression varied across the world; in most countries, it started in 1929 and lasted until the late 1930s. It was the longest, deepest, and most widespread depression of the 20th century.
The consensus among demand-driven theories is that a large-scale loss of confidence led to a sudden reduction in consumption and investment spending. Once panic and deflation set in, many people believed they could avoid further losses by keeping clear of the markets. Holding money became profitable as prices dropped lower and a given amount of money bought ever more goods, exacerbating the drop in demand. Monetarists believe that the Great Depression started as an ordinary recession, but the shrinking of the money supply greatly exacerbated the economic situation, causing a recession to descend into the Great Depression.
Monetarist and Keynesian two theories have a different views of why this comes. But both agreed that the Stock market crash starting on October 24, 1929, was not a cause but a symptom.
The situation at that time was different. The problem today is also other. Today we have something which is not theoretically possible, Negative Interest Rates. The effects of central banks and Governments at that time were working differently. Today though GROSS FIXED CAPITAL Formation is lesser, before Corona, it was also not much high.
So now the question is how to come out? Who will help? Keynesian or monetarist?
What I am reading is all about monetarists. IN the US, Trump Government is giving out money to everyone. US Central bank gives out money at zero cost. But the question is, will this support demand growth.
The issue for many sectors after Corona will be demand. What I am listening to from any news coming from china is that they started a movie theater, and they just shut down in two days as no one wants to see a movie after such a devastating pandemic, beyond doubt. The priority will be health care. Bloomberg takes an interview with some artists. They mentioned that there would be no tour and entertainment shows in 2020.
While just writing this, I am listening to the news about crude oil prices around $2. If it keeps going its way, a commodity will come close to zero for the first time in history. That too crude oil. That talks itself about the economy.
So my question is, what will be our choice? Are we going to a monetarist way? The same way we kept going after the 2008 crisis. Sure it solved some questions, but it generated one big one. What can we do about negative interest rates? This is the question that we can’t ignore. Sure, we can’t overlook the importance of the money supply. It is a fact that if you double the money supply, the prices will also change. I agree with the criticism which Keynesian economists face. The Keynesian economist does not mention where the government should stop and where privacy is supposed to give complete control. Because when one private industrialist wants to raise capital, he is directly competing with the government, which affects the money supply.
On the other hand, I saw the effect of interest rates and how they worked during the 2014 crisis in India. When India was one lost case, it was Raghuram Rajan who handled this case with the help of interest rates from a Powerful central bank. I also saw the effectiveness of Quantitative easing. But I also saw the way valuations went wrong in many capital markets. As a complete capitalist, I believe that there must be one logic for valuations of all the stock prices because many times in history yield curve was one indicator of predicting all such crises. When the supply of money is increased, I saw that junk bonds start showing the exact yield as Sovereign bonds in some economies.
I do not deny the importance of monetarist and Keynesian, but I am interested to see how the economy after Corona will shape.
