The decline in demand is not the cause of recession but a symptom of it.
Thus the current fall in demand - for houses, for expensive goods etc - is merely a symptom, not a casue of the recession.
In which case....it makes no sense to prop the demand, treating the symptom, as long as the root cause of depression, a drop in profitability of production, due to misallocation of resources, is not fixed.
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Incorrect. To cure the illness, people get rid of the symptomes.
ReplyDeleteSo:
to fix a drop in profitability of prodction, you need to give people money so they could spend them on goods, therefore, companies will make profit.
I think the answer here should be the multiplier effect, which through the injections into demand in the long-run is likely to increase national income and encourage more spending, therefore, bring more revenue to the companies. The companies might spend those money on dealing with the main economic problem.
"you need to give people money so they could spend them on goods"...And cause a hyperinflation as in Mugabe's state.
ReplyDeleteI thought that the problem was in the overvalued assets of banks plus infinite greed of the bankers themselves.The value of the assets was growing like a bubble allowing banks give credits and by that support the needs of real economy.
Now assets depriciated and thefore banks can't lend money therefore firms can not expand,have to cut costs and by that cause uneployment which leads to a fall in demand:D
I don't know whether the drop of profitability of production was the cause for the current recession. I agree with the comment above that its root cause has little to do with production and the 'real' economy. It started with the the meltdown of the banking system. Therefore, it is crucial to re-create the financial sector and at the same time boost demand in order increase business confidence and business creation.
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