With respect to the last post, Sanjay has raised an interesting point on whether consumer confidence can be raised in any other way without infrastructure spending. This post is an attempt to answer that question. Let's step back and go back to the post "Delevering part I". In that post i had given an illustration on the how the liquidity cycle operates. In the current scenario in US we are facing a deadly combination of fall in consumer demand, fall in private investment and liquidity issues. All of this is exacerbated by the fact that the jobs fall is preceeding output fall currently. In the sense companies are quick to cut jobs. All of this is just to get an idea about the current scenario in US.
Coming back to the question of Sanjay, lets us just think what is the primary reason that will make the consumer start spending again. Stable Income and a sense that the prices are not going to keep falling. Please keep in mind that i am stressing on Stable and not on the quantum of income, to indicate that the consumer should be confident of getting a pay cheque at the end of the month. The three important elements i stated in the first paragraph (liquidity, private investment and consumer spending) are interlinked. The cycle is a self feeding mechanism which moves in both directions swiftly.
The following steps could be a way of reducing the reverse flow of the cycle (other than the "normal" way).
1. Government makes firing illegal (other than for illegal and harmful activites by employee)for a short duration of time and gives the companies the flexibility to cut salaries (even of unionised employees).
2. Floor prices to all assets linked to the prices before the bubble period taking into account the due increases due to inflation.
3. Make it mandatory for banks to lend/keep the liquidity flow.
These are extreme steps and is a gross manipulation of the market. But we need to consider the fact that in the current scenario market is in a distress and needs to be fixed.
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