To Sid, With Love

This post will explain you that, why this period will not be of subdued economic activities. This will be worse, besides good economic activity.

I liked the golden words from Sid, "The monetary supply, to maintain balance, must grow at a rate which approximates the growth in productive output, otherwise the money system will eventually starve itself of liquidity". This is perfectly right.

But my question is, What happens if the money supply increases without productive output.
People have gone crazy these days, they are hoarding on to cash as the best investment. If people keep the cash with them, the system will starve from liquidity. So government will have to inject more cash in the system. But, people will hoard all that cash again. Government print more and injects more.

Its sort of government is trying to unclog the credit system, by throwing cash. But people with all their belief that this is the end of 50 year long Kondratiev_wave, keep on hoarding cash. This creates a oversupply of cash in the system. Though, it will not look like it, because people are hoarding cash. But what happens when all this cash comes out to buy something.

My golden words are : "If majority understands the system and take action against it, the system changes itself".

Banks, whose primary duty in the system is to lend, are refraining from lending. People are so sure that this is great depression, they are keeping their cash at home. Everybody is cutting on those new purchases, because they think, they will be able to buy cheaper later on. Governments to stop the world from severe problem, are printing money, cutting rates, providing liquidity.

My view is also the same, that it will be very long slump in global economy, it terms of productivity. But, governments printing money at an insane rate to keep the system intact, are doing wrong. In dollar terms, it will be period of growth. People around will have a more terrible life, but Dow Jones Industrial Average will make new highs. Wages will be less, but not in money terms, but only in terms of things they can buy with it.

Kondratiev Wave, wiki page says this, "The business cycle is supposedly more visible in international production data than in individual national economies. It affects all the sectors of an economy, and concerns output rather than prices (although Kondratieff had made observations about the prices only)."

This is precisely my argument, the real economic output will be far less, but prices will be far more. When the cash which is being hoarded upon, comes out to buy something, things will appreciate in price. If prices of essential commodities doubles from here, the money system will ask for more money to buy essential things. This will lead to governments printing more, essential commodities rising more, money system starves again from liquidity and so governments print even more. Positive feedback loop of price rise begins.

I hope i made some of your questions clear, and planted new questions.