I have lately come across various arguments, particularly from Roubini about the cataclysmic conditions the world economy may foray in 2013. I have arduously mentioned in my previous articles about innovation and capital injection that the European economy is in shambles not because of the fall in Aggregate Demand but its seriously an inactive supply side. Thus the injections however are not going to help, as they didn’t; nor will they because the problem lies with the supply side.
Its an obvious reading and economics doesn’t provide u any moment of elation because when there is a boom the boom will grow in to a bubble and a contrasted fall along with it is relevant.
The agricultural effect on the world economy
The wholesale price index / consumer price index have significantly risen during the past 4-5 years. Taking a look at the agrarian economies: no country has shown a significant rise in agriculture-GDP ratio, and unfortunately many countries registered a negatively reducing ratio against GDP (except a few countries like Guatemala).
This neglect of the primary sector has contributed to food inflation. The bail-out plans which now come into the scene thus fail to work and if we have to raise the demand, where are the products to buy at the price ? This has only aggravated the wage-price spiral. Yes, the people are happy with the increasing wages, yet can somebody ask when will the spiral end ? Well, the answer is simple – Increase the GDP. That again takes us back to the limitations and failures that have caused distraught among people, the failure attributed to the supply side.
Increasing the Aggregate Supply is the only way out, which should be more in the primary sector growth sphere than any other sector. Though the Philips Curve hasn’t failed with this nature of crisis, but I guess we will have to agree with what Roubini has said about the coming crisis till the supply doesn’t kick up.
The recurrent inflation has been fended off with monetary tools, particularly the interest rate manipulation. Monetary Policy is a stop gap measure, its scope doesn’t lie anywhere beyond that. It caters to the demand and its use as a long term measure against inflation is only going to worsen the situation of the economy. As said above, this only begins the wage-price spiral, also a wage-wage spiral.
Depressions can be fought better with time, than any other tools. It is the basic law that the positive curve the economy took will also take turn to be a slumping curve, that will be proportionate to the time period that the supply shock (positive or negative) has taken to build itself. It will take time until only after 2017 that there comes stability or high growth trajectory coupled with low inflation. I can say, brace yourselves up for a few more years.