Economics is not perfect science, although biology is. 

Any monetary policy action is expected to generate few likely outcomes of vastly different nature. The exact outcome, which is likely to be different in each context, will depend on the nature of policy-action and the situation. However the exact outcome can never be predicted as it is possible in the area of science.

The well-known story of Bernard Shaw goes like this: A young and beautiful actress once proposed to George Bernard Shaw in his old age. She hoped for perfect children from the marriage, due to the beauty of the former and the wisdom of the later. 

Bernard Shaw first complimented the young actress for her splendid imagination. However he also noted: “But, what if the children take my appearance and your wisdom?”

Because in a scientific area like biology, we even today don’t know exactly what drives wisdom or beauty in a person (all the genes). It is naturally more so in the field of economics as we don’t exactly know what creates employment or inflation in a real world that changes every day.

Stimulus in one nation, in an era of Keynes when global economy was not as integrated as it is now, had a different effect within that nation than it is likely to have now. US policymakers would love to create a fraction of the jobs, that actually are getting created every week in China, India and in the rest of the emerging nations, in US itself.

The irony is, surely a small but significant percent of the jobs, that are being created in the developing world, is due to the ongoing stimulus in the US. $40 billion of monthly trade deficit in the US can support 4 million job-creation every month in the rest of the world, assuming (1) minimum salary of even $1000/employee, and (2) 10% of the figure is spent as salaries.

US economy is showing signs of doubtful recovery since 2008, however the job market surely hasn’t shown any ‘green shoots’ as of now. In the same interim time, the headcount of Indian IT firms or Chinese manufacturing firms (both exporting to the US) have grown by millions.

A fraction of that has been possible due to the economic recovery/stability in the US (without the job recovery).

Bernanke’s hope, like the imagination of that actress, is: Only if, only if a fraction of these jobs can be created in the US (no denying here that more job losses in the US have been avoided by stimulus).  His assumption is the money he throws from the helicopter remains in the US. Problem is: a significant part of that extra money, that is used for consumption, remains in the US; whereas the other part of that money is invested to create productive capacity in emerging nations.

His other hope is: inflation will remain low as high unemployment will mean less demand in the US.

However the millions of people, gaining meaningful employment elsewhere in the developing world, will have their consumptions. So the global consumption need not necessarily slow down. Car sales in the US might have fallen, but globally it gained significantly. In the global economy of present age, we are likely to see higher inflation everywhere when additional demand in the rest of the world more than adequately makes up for the lost demand in the US.

And now add the persistently loose monetary policy present in the US and in much part of the developed world.

Therefore Bernanke must not rule out the other possibilities of his innovative, easy monetary policies.  It is not deflation that the US (and the world) should be worried about. The last decade of Japan saw loose monetary policy only in Japan, along with trade surplus in Japan. Demand generation from China and India was not as significant ten years back as it is now.

It is the spectre of inflation which may start haunting the unemployed in the US soon. Rather than becoming wise and beautiful as Bernard Shaw pointed out, the calls for more stimulus to help the unemployed in the US may backfire to the same lot when prices and interest rates start rising.

Signs of this spectre is already visible in the emerging nations.

Given this situation, the question Bernard Shaw would love asking Bernanke is: “But, what if the unemployment continues to be high in spite of all your actions and the economy shows signs of inflation due to all your actions”?

I invite you to visit my blog, Wondering Man (or take a look at my book, Wondering Man, Money & Go(l)d at Google Books). You are also invited to join me on Twitter.

Be Sociable, Share!