Delevering Part II

Carrying forward form the last post, so where does the government get the money to do the infusion. The government may also look at cutting interest rates to make it more attractive to spend and borrow. But in these times where no one is lending due to counter party distrust, lower interest rates may not do the trick. Going to low on them might leave your monetary policy with no room for further measures. Coming back to our discussion, the following might be the possible ways 

1. Own funds : Countries which are flush with money accrued during the last few years of boom, have the fire power to infuse the their economies with cash and make it easier to restart the cycle. They may even undertake fiscal measures not worrying much about fiscal deficits. China is one prime example to an ideal member to this group.These countries may even play an important role in changin the world order in terms of financial strenght. There is a lot of talk of new "Bretton Wood " system to be created, these countries may try to play an important role if at all such a system is created. Do not think US will be sole financial super power which can do anything. After this fiasco we can expect other countires to force US to follow the disciple it preaches others to follow. These countries are the one'w which are most favourably placed, on an overall level they can make the delevering process quite smooth if they want it. Else if they are interested in keeping the bubble going they can also do so through domestic consumption.

2. Go IMF/other countries: Few countries may find that the cost of restarting the system is too big for them to fund. They are either near bankruptcy or either very close to it. Iceland, Hungary are few examples. I have not mentioned Pakistan here as i believe that the issue with Pakistan is more to do with lack of governance and terrorism. It would have faced the current situation even during the best of times. These countries are in for a tough time. They would have to follow strict policies and endure pain in the short term. Citizens of these countries would face harsh realities atleast for some time to come.

3.Sell Bonds/ Curtail expenses: Some of the countries like India and US, have the firepower to infuse thier economies with cash. But their are limts to which they can do the infusion. India and US have fiscal deficits. Their current account deficits till now have been funded by foreign investors of varying kinds. The twin deficts of fiscal and current always have created issues, as flight of money out is always accompanied by a weakening economy. This further restricts the government from going on a spending exercise to jump start the economy. India is already looking at breaching its fiscal targets for the current year. The money used in restarting the economy would come either by raising money through bonds at high interest rates or via curtailment of expenses in some sectors. Retracting expenses also is counter productive as government spending in absence of domestic consumption would be necessary. If the bonds do not get sold, the they are in for a rough ride. Can't say much about this group, the actions they take would determine to a great extent. Some of them my create another bubble to restart and then cut back on leverage. Some may follow the same path of the last few years after restarting.The former might go throught a tough period in the short term but the latter is in for a greater blowup.

If you think there are other possible ways please do get back.