Aggregate demand, corporate debt and deleveraging

Here are a couple of articles which indicate the consequences of a slack in aggregate demand on corporate debt and the growing need for companies to deleverage debt through asset sales.  We can notice this trend not just in India but also in China.

http://www.livemint.com/Companies/JBn41JpbNPdPBxzOb2FzIO/LT-to-sell-assets-dilute-stake-in-noncore-businesses-AM.html

http://www.thehindubusinessline.com/opinion/editorial/taking-a-haircut/article7678161.ece

Does the government need to step in and increase infrastructure spending?  Can we hold on to "austerity" and worry about fiscal deficit targets?  How do we know that infrastructure projects will not be underutilized (like ghost towns in China)?

These are questions to ponder over.

The pressing need for a new perspective

Today's piece by Prof. Deepak Nayyar in the Livemint (12.06.2015) clearly summarizes the problem with neoliberal economics - although the work neoliberal was never mentioned.  At the core of neoliberalism is inflation targeting and its consequent implications for control of the fiscal deficit. These policies are strangling not just India but even countries like Greece which are unable to come out of depression.  Prof. Nayyar has highlighted the need for "to question and get away from a blind belief in any idea, for ideologies that turn into faith are dangerous."  Who can disagree?  But critiquing economics has always been countered with the question; what is the alternative?  I think here we need to turn to post-Keynesian economics ... and Modern Money Theory in particular.

Here's the link to Prof. Nayyar's article:

http://www.livemint.com/Opinion/DubsmSzgYLBp3Swu8TqPII/The-interest-rate-conundrum.html

Decentring Fiscal Deficit Target Numbers

You can find my article in the Economic & Political Weekly of 09-05-2015.  Or follow this link:

independent.academia.edu/SashiSivramkrishna

The article questions the obsession with fiscal deficit traget numbers like 3.1% of GDP or 3.6% or 3.9%. Does it really matter?  Should it be the goal of macroeconomic policy??

This is what MMT is weary about ....

Union Budget 2015: FM Arun Jaitley hints at more cuts in spending

Ahead of the Budget 2015-16 to be unveiled later this month, Jaitley hinted at a stable tax regime, saying that 'no unfair effort' will be made by states and the Centre to mop up revenues.

Having already crossed the fiscal deficit target in November, Finance Minister Arun Jaitley today hinted at more cuts in spending so as to contain it within limits for the current fiscal, saying he does not believe in living on borrowed money.

"We're trying to rationalise expenditure as far as the government is concerned because we do not want the government to live on borrowed money indefinitely," he told a gathering of industrialists and planners here via video conferencing.

"The whole concept of spending beyond your means and leaving the next generation in debt to repay what we are overspending today is never prudent fiscal policy," he said. The additionally hinted spending cuts would be over and above 10 percent that the government has already announced to meet the budgeted 4.1 percent fiscal deficit target which was crossed in November itself -- four months ahead of the end of the financial year on March 31. 

…..

Read more at: http://www.moneycontrol.com/news/economy/fm-arun-jaitley-hints-at-more-cutsspending_1294457.html?utm_source=ref_article

The conventional circular flow and endogenous money

Once again a report in the Livemint of 27-11-2014 caught my attention;

“Perhaps the reason we have been so willing to protect the borrower against the creditor is that the hated moneylender looms large in our collective psyche. But the large borrower today is not a helpless illiterate peasant and the lender today is typically not the sahukar but the public sector bank. In other words, we are the lender,” said Rajan in his speech on Tuesday, adding that when the large promoter defaults wilfully, he is essentially robbing the taxpayer and making it costlier to fund new investment in the economy.*

This sounds so much like the conventional circular flow reasoning - that deposits come before lending.  Endogenous money questions this view; loans create deposits.

I am not questioning the fact that growing NPAs are a cause of concern but simply raising the point that economists still cling to the conventional view that banks use savings to lend just like the moneylender.


* Read more at: http://www.livemint.com/Money/TaNyxECKa6pbuWYuS7vAaN/RBI-ready-to-give-more-flexibility-in-recasting-distressed-l.html?utm_source=copy