Letters: Capital conundrum

Paul Krugman faults Ben Bernanke on what he considers inaction in view of the economic crisis that the US is facing (“Paralysis at the Fed”, August 14). He proposes to the Federal Reserve a repeat of what was administered after the Lehman crisis. He feels that the present impasse is the result of the Federal Reserve terminating its previous unconventional adventurism. It is difficult to understand how continuing with the loose monetary policy would achieve greater success than what was observed earlier.

The basic question is: “where has all the money gone?” It has partly been neutralised by US citizens who’ve increasingly taken to saving money. Further, the excess liquidity has been absorbed by foreign countries by way of imports, and this creates jobs in those nations. A look at the automobile sector alone will prove this. The US is seeing massive imports of automobiles from India and other countries.

The best way to know where all the money goes is to look at the input-output table pioneered by Leontief. It will clearly show how much of the money is not spent at home. For quick evidence, look at the high trade deficit of the US. Technological development is another source of the problem. The capital-intensive technology results in redundancy of labour. The automatic assembly-line technique of the automobile industry in Detroit has been replicated in many more sectors. Under these circumstances, one wonders how any repeat of the easy monetary policy can help the US, though the rest of the world will welcome it for its own reasons.

A Seshan, on email