An economy bubbling with activities is most likely the one that trades in goods and services, for which the monetary policy makes allowance for a measure for interest rates to be not such that lending should suffer while making appropriate adjustment for savers to continue to reap benefits that loads up the investment cycle as well.

The worse is when such lending does not make a marginal contribution to the last goods bought or sold, so that on one hand the slackness perpetuates, while more lending is thrust upon as the only measure that some economists say would force buying and selling of assets, rather than goods and services.

Why I consider this as a worse option is because it makes an unequal and disproportionate contribution to the already unequal distribution of wealth. Ultra low debt rates continue and become benchmark against a rising equity return as trading in equities end up moving the prices upwards. The rest of the economy remains insulated to this as capital gains hardly ever trickle down at the predicted rates, at least we have little evidence for that.

Any positive delta encourages the flow in that direction and more flow jacks up the prices even further and while the balance sheets look flush with cash, the only “economic” utility of that is found in trading of assets, good firms and better firms line up in road shows, as equity investors make a beeline.

Think of the best balance sheet in the world, it has absolutely no need of debt to grow at 20% year on year, but it still makes enormous sense to let the ultra low interest rate offerings go a waste; there is great sense to use this to fund the asset buying (its own equities). If this flow is stopped there will be catastrophic consequences; therefore the flow continues as there is little use of this surplus cash.

This can be a temporary phenomenon at best, the real economy is about goods and services. But so we thought, in some economies, it looks different.

A 3% growth rate for a matured economy like U.S. is considered a great achievement, but if you look into specific details, you would see that there is no net change in employment numbers and no net change in median wages; the entire growth in income is heavily skewed and driven by capital gains from net assets for a minuscule population.

This again should be a temporary phenomenon and must trickle down, unless this becomes the new norm or a unidirectional movement that has no holds barred; tax breaks for example could make this permanent, at least in the short and medium term.

Are there lessons for other economies like India? Yes of course, we must be careful that our supply side should be the driver of value in the economy and focusing on the infrastructure and skills up-gradation could make a world of difference.

The economy like India should and always be looking at trading in goods and services to grow; assets should be a by-product of all its economic strides, not the only product that attracts all the capital flows.

Settling for such a denouement for a developing economy will be very sad.

Trading assets cannot be the only activity in the economy

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