The path to a self-fulfilling economy and the existing scenario

A self-fulfilling economy is a fairly basic concept in economics. Demand generates production- which generates employment and therefore wages – and wages generate consumption – which again generates demand. Lets keep this aside for a minute.

Secular Stagnation has been the phenomenon since 2008, and the only solution seems to be in the root of this cycle – Demand. Increasing the level of aggregate demand and therefore providing an inducement to the system, may be a solution for the short-term and medium-term. Then, what about the actual part where the economy must become self-fulfilling at some point?

The starting point to the explanation is probably in a paper by Krugman (1979, 1996)[i]. The paper talks of models (and changes in models) describing the then existing currency crisis – essentially from two perspectives; the need to monetize and maintain a fixed exchange (to run away from the then existing crisis, to be exact), and the need to contemplate the crisis from solutions to it and thereby maintenance of objectives (for the long run).

When just one fundamental factor like interest rate is considered, rising interest rates were predicted to create major credit crunch starting in economies like China, Brazil, Chile and others, seemed inevitable, back in September 2015. There is bound to be some spillover effect, particularly in the emerging markets like India, China (yet again) and some more countries that are particularly labour-intensive. More on this kind of effect is detailed in this study.

[i] Krugman’s paper: http://www.nber.org/chapters/c11032.pdf

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