The Hindu Business Line : US rate cuts and their impact

The article “The $3.8 trillion promotes depreciating by the hour” (Business Line, December 21) on how the interest rate cuts by the US Federal Reserve promoted consumer spending and imports into the US is sound economics.

One wonders why this logic was not invoked by economists and financial institutions in the US when rate cuts were being effected. The kind of analysis provided by you is simply blacked out from US media.

However, a related issue not touched in your analysis is the impact of the Fed’s cheap money policy on capital formation.

A part of the transfer of household resources to the corporate sector could be expected to have led to an increase in capital formation in the corporate sector. In turn, more investment by the corporate sector would have led to higher productivity. The fact that there was no run-away inflation in the US despite cheap money policy could partly be due to higher productivity and not, exclusively, imports.

Further, imports by the US have accelerated economic growth in East Asia and, perhaps, in Europe too. From this angle, a cheap money policy without inflation may have done some good too.

The crux of the problem is the decline in the value of the dollar not only vis-a-vis commodities and gold but also against other currencies. The decline should have had an inflationary effect.

However, with the exception of some commodities in short supply there are yet no signs of inflation.

Finally, is there also not a need to look into the US balance on capital account?

That would have to take into account new investment not only in the corporate sector but also in the household sector in terms of new construction and investment in foreign stocks, etc. by US households. All in all, it seems to be a mixed bag, call it a mixed disaster or a mixed blessing.

Your analytical acumen may perhaps throw more light on this complex interaction of forces.

Ashok Choksi e-mail

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Your article was a real eye opener. Why do the governments all over the world lend/invest in the US when they can make use of their own money in a much better way to service their own country/population?

Kalaimani e-mail

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