A relative of mine (he’s a major academic in one of the Big 5 in the US) explained to me the concept of good inflation!
Common sense economics will tell you that if you increase money supply, prices go up and it results in inflation. That is usually the reason why the RBI (or any Central Bank) raises interest rates. Increased interest rate slows down consumer spending, controls prices and reduces inflationary pressures.
The flip to all this of course is deflation. Weakened consumer sentiment results in lower spending which leads to reduced output. Over time, deflation slows the economy down, triggers job loss and creates recessionary pressures….resulting in a slowdown, and in a nightmarish scenario, a Great Depression.
Over grand sweeps of time, the global economy oscillates between inflation and deflation. Currently, we’re in a slowdown…and trying to climb out of it.
So how do you turbo-charge this process? Print more money.
Print more money. BUT use it for long-term infrastructure, not short-term stimuli. What this means is – don’t print money and “lend it” to unemployed people to buy more stuff easily – that leads to bad inflation. Instead, print more money and “pay it” to unemployed people in exchange for some infrastructural creation – build roads, bridges, power plants, connect rivers, grow agriculture, create new cities, create new jobs…
Printing and introducing money into the system in this way will cause some inflation in the short-term, but in the process we would have built lasting infrastructure and turbo-charged the economy. In the US, they’re calling it Federal Aid. In India, we’ve always called it subsidy.
Sounds so simple, doesn’t it?
What’s the catch then? Corruption 🙂
SAMEER NAIR 