Cash and the Public Distribution System in India - Questions of priority and implementability

The Indian government has decided to go full steam ahead with its plans to disburse public distribution system aid in the form of cash rather than food. The government plans to have the cash deposited in the bank accounts of intended recipients and the system is supposed to make use of electronic Aadhar cards. A comprehensive food security framework that ensures adequate nutrition to all deprived and vulnerable sections of Indian society has not been implemented yet. But the government is busy publicizing the detailed manner in which it intends to disburse PDS aid. As far as the poor are concerned, the actual allocation of aid matters way more than the exact manner in which the food reaches them. This obvious fact seems to be lost on the Indian government.

A large proportion of the Indian population is still illiterate. Any PDS system that the government runs should be made intuitively easy for all Indians to understand, even those with no or limited literacy. Experts in human-machine interactions and experts in governance can try to determine if direct food disbursement or non-electronic cash disbursement or electronic cash disbursement will work better in the current Indian context. May be the Indian government should hire such experts and form a committee comprising some of them to recommend the best way to disburse aid. For cash disbursement, careful thought should be devoted to determine if traditional non-electronic banking or electronic banking is better suited in the current Indian context, where massive development challenges still remain and where literacy rates are still not at rich country standards. As for corruption, a lot depends on the people running the system and electronic systems cannot be expected to be immune to corruption. The fanfare with which the government is going about its attempts to introduce the electronic scheme while crucial questions about the storage and distribution of foodgrains remain and while lack of literacy hobbles large segments of the population is an example of the superficiality that has crept into government policies in recent times.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

US funding of groups opposed to the Bashar Al-Assad regime in war-torn Syria - legal and strategic questions

The Syrian government describes the rebel groups fighting aginst the Bashar Al-Assad regime as terrorists. The White House prefers to see the efforts of these groups as a fight for democracy. As in many such cases, the reality is complicated, no matter how much the White House tries to couch its interference in Syria in a make-believe language of moral clarity. The question of the legality of US interference in Syria in the form of aiding rebel groups becomes significant in the light of past history and because of the possibility of similar situations arising in other parts of the world. The historical precedents do not provide clear guidance in this matter. While the International Court of Justice ruled aspects of US involvement in the funding of Contra groups in Nicaragua to be illegal, instances like Afghanistan and external support for groups in Cold War conflicts in some other countries have not been subjected to any kind of consistent international judicial review. Funding of insurgent groups by individual countries and the bypassing of UN mechanisms while doing so are vestiges of the power structures of the past centuries and the Cold War. The extent to which these power structures will be dismantled in the coming years will determine how strongly UN mechanisms will be able to react to instances like these and how well the aggressive ( often over-aggressive ) actions of powerful nation states in such cases can be curbed.

Mr. Lakhdar Brahimi's diplomatic efforts have yielded limited results as both sides seem intent on escalating the conflict to the fullest extent possible. The incongruity of UN peace efforts proceeding in parallel with possibly illegal interference directed against the Syrian government by a major world power and a UN Security Council member just goes to show how complex the issue is. While the White House funds only non-Al-Qaeda groups opposed to Bashar Al-Assad, it may well be contributing to creating a situation where Al-Qaeda may control some regions or where Al-Qaeda may increase its influence in Syria. What kind of political equations will emerge out of these conflicts ? Will they lead to stable governments and the cessation of conflicts ? UN-led dialog, rather than US-funded insurgency, most probably stands a better chance of leading to stable political solutions, an end to recurring violence and justice for all groups involved.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Credit rating agencies and India's public finances

Like many other countries, India has received several warnings from international credit rating agencies about its public finances. The global economic crisis that began with the financial crisis of 2008-09 has pushed several governments into precarious situations regarding the sustainability of their public finances. The last downgrade of India's sovereign debt did not have any significant impact on India's government bond yields. This goes to show that the grades assigned by credit rating agencies are not the only things that the bond market takes into account while determining the yields on government bonds and the ability of the government to borrow money. However, like in the case of Europe, credit ratings can serve as useful warnings about possible vulnerabilities in the public finances of a country.

Since credit rating agencies do not specify recommended yield ranges for government bonds, individual and institutional investors should conduct their own independent analysis about government bonds. This has been the case for several countries in recent months. The yield on Indian government bonds of different maturity lengths has been around 8% recently. While India does need to take measures regarding taxation, spending ( for example, the right mix of subsidies, the right timeframe of subsidies etc ), growth and development, the recent threat by Standard and Poors to downgrade India's sovereign debt to junk status seems wide off the mark as regards the reality of the Indian economic scene. The recent Kelkar Committee Report and the Indian government's willingness to act based on it are signs that the Indian government is serious about addressing the fiscal sustainability issue ( the details about how fiscal sustainability is brought about and the right mix of policies needed to balance the goals of fiscal sustainability and human welfare do need to be determined carefully by the right kinds of debates inside India ).

Credit rating agencies should be careful when analyzing countries like India where massive human development challenges still remain. Also, their stress on the term " reforms " when it comes to rating India's government debt may well be a sign of superficiality in their analysis of the Indian economy and the short-term and long-term fiscal sustainability of the Indian government. A lot of the " reform " measures announced by the Indian government like relaxing FDI requirements in retail and in insurance may be less crucial for fiscal sustainability than things like human capital development, equitable growth and the health of the infrastructure sector. One cannot expect changes in FDI rules alone to bring about sustainable growth when the country has massive challenges in the areas of aggregate demand, human welfare, human capital etc. These factors are not necessarily significant to the same extent for European economies. Therefore, the impact of laissez-faire economic policies on growth and fiscal sustainability can be expected to be different for India and the European countries. Excessive stress on these " reform " measures and negligence in the human resources area and the aggregate demand area can even lead to weakness in public finances.

India's tax revenue to GDP ratio is less than 15% due to several structural factors. India's slow pace of development in the rural sectors of the economy is a contributing factor in India's inability to raise more tax revenue. While many will agree that economic growth, understood broadly, will be a crucial factor for improving the government's ability to increase tax revenues, there is a lack of agreement about what kind of growth ( the sectoral distribution of growth, the rural and urban components of growth etc ) over what kind of timeframe will best lead India to a stage where the government can reach tax revenue to GDP ratios that will help it sustain crucial development efforts and welfare systems. The elitist bias of the recent decades in Indian economic policy is not conducive to the creation of broad-based growth. Continuation of the same bias can lead to a stagnation of tax revenue to GDP ratios. It is time for intelligent opinion in the country to realize the inconsistency between the need to run a well-funded modern government in a modern state and the large inequalities in economic growth between different sectors. It is also time to base economic policy on good projections of several important macroeconomic parameters and not base policy predominantly on overall GDP growth rates. Also, it is time for economic policy to be based on a better discernment of the differences between short-term and long-term economic dynamics. The same also holds for credit rating agencies trying to grade sovereign debt and other aspects of the economy.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

The real problems, Mr. Hatch, for US public finances, are multifarious and multifaceted and go beyond anything as simplistic as just entitlements

Senator Hatch has stated something along the lines of - entitlement spending is the real problem confronting US public finances at the moment. The real problems, Mr. Hatch, for US public finances, are multifarious and multifaceted and go beyond entitlements. Just ask somebody like Mr. Paul Krugman. Or other Republican senators.

Dangerous simplifications can lead to dangerously misleading and wrong solutions. Why not defense cuts, Mr. Hatch ? And why not do a dispassionate study of different taxes and the potential impacts of different tax rates on investment, growth, fiscal health etc, both in the short run and in the long run ? Identifying the real problems confronting the US economy requires going beyond mere soundbites. It is time for the US political system to rise up to the challenge.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Compromising the Baucus-Conrad way and implications for the future of the US economy

Senators Baucus and Conrad have expressed their preference for compromising with the Republicans on entitlement spending for Medicare and Medicaid in return for tax increase concessions. The Senatorial voting arithmetic based on ideological predilections and other factors on the tax-spending questions isn't clear. For example, Senator Chambliss, a Republican, has expressed his willingness to be flexible on the tax increase question. Whether or not significant compromises need to be made about spending in order to reach agreements with Republicans about taxes, the question of why Senators Baucus and Conrad decided to focus on entitlement cuts rather than other cuts like defense cuts still remains.

Americans and Democrats deserve to hear specific numbers from Democratic senators like Baucus and Conrad. When it comes to Medicare cuts, what does " rich " mean ? If these " rich " are availing of Medicare at the moment, where will they come up with the resources for equivalent medical care if their Medicare entitlements are cut ? Senators Baucus and Conrad are effectively stating that the US can no longer guarantee the same level of medical care without jeopardizing the future fiscal health of the US. However, the question arises - how do you know if this is indeed the case ? In other words, why should parts of Medicare expenses be the ones to go in order to restore the US to good fiscal health and good fiscal prospects ? Why not try to find specific defense cuts to achieve the same objectives ? Also, what amount of cuts are Senators Baucus and Conrad recommending ? What are the numbers as far as the mix of tax increases and Medicare spending cuts they are suggesting goes ? Without specific numbers from these Senators regarding tax increases and spending cuts, it is difficult to reach an intelligent assessment about their suggestions.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Mere gimmicks won't help the Indian economy

The UPA government has expressed confidence that it will win the FDI ( foreign direct investment ) vote in parliament. India is one of the most complex countries in the world, especially when it comes to the functioning of its political system. Parliamentary arithmetic may well save the UPA government. However, Prime Minister Singh, Finance Minister Chidambaram and the Indian National Congress Party have betrayed a sense of desperation by allowing majority foreign stakes in multi-brand retail. Since retail isn't manufacturing and the entry of foreign retailers in a big way can cause irreversible harm to domestic retailers, the costs to the Indian economy may well outweigh the benefits. After trying to draw comparisons between the current situation in India and the early 1990s, why did Prime Minister Singh resort to something like FDI in retail, whose benefits are questionable and whose potential to cause harm are non-negligible, as one of his and the Congress Party's major advertising items ? It seems there is a lack of quantitative thinking in the way crisis situations in the Indian economy are being tackled.

The UPA government may survive the FDI vote, but the country will still be left without convincing answers to its economic travails. There is a lack of stress on the country's internal economic strengths. Instead, there is an over-reliance on possible foreign capital, and there too, the approach is not very clear or comprehensive. And it smacks of elitism. Given how India's GDP growth has failed to bring the desired levels of improvement in living standards for the broad masses, this approach, that is elitist both in reality and in appearance, can prove to be politically costly for the Congress Party.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Two incompatible aims for the Afghan president

Hamid Karzai has reportedly acquiesced to US efforts to keep 10000 American troops in Afghanistan beyond 2014. The Afghan president has also reportedly initiated moves to start some kind of peace dialog with the Taliban. Any realist should view these two aims of the Afghan president as incompatible for the most part. Only the most naive would expect US military operations to remain confined to strictly defined aims, pre or post 2014. How Hamid Karzai proceeds on these two fronts remains to be seen. It certainly does not give the impression of strong leadership in Afghanistan. Weak-kneed is a more appropriate description. The fact that Afghanistan still does not have trained troops and trained police stretches one's credulity. Better and stronger leadership will hopefully emerge from democratic and negotiation processes in Afghanistan in the coming months and years. Better and stronger leadership that can bring to Afghanistan indigenous frameworks for dealing with terrorism and other security issues.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

How the political establishment in Washington DC is leading the US down the drain

Probably never in US history has its political establishment been so lacking in its response to the kind of dangers that the country is facing. These are not very visible dangers, like external aggression. But the implications for human welfare and for the sustainability of the economy are enormous. Politics as usual in Washington DC leaves one wondering as to how the US public has grown so apathetic about its own future and so lax in the kind of performance it demands from this establishment. Any astute observer of the US political scene of recent times should be able to gather that the puniness of the Washington DC politicians and the gargantuan scale of the short-term and long-term problems facing the nation will soon begin to tell on the nation's health in ways that have the potential to create intense strife, instability and hardships.

If one goes back in history, the Great Depression is one instance where the country was faced with dark, gloomy and uncertain economic prospects of an unprecedented nature. Even though the Great Recession wasn't as severe as the Great Depression, we still don't know whether or not we will slide towards a double-dip recession in the US. Also, there are many more people in the US than during the Great Depression. Never underestimate the importance of a large population when economic stability and sustainability are issues. How and in what manner this can enter into the economic well-being of the country is difficult to tell, but only the most naive can assume that it is an irrelevant factor.

The defense budget of the US is a big albatross around its neck. It is buying the US little in terms of security or image. However, it contributes to the creation of a macro-economic time-bomb in the form of a possible debt crisis. The miltary-industrial-political establishment may have become bigger since the Great Depression, but it has not necessarily improved in quality. In fact, quite the opposite is probably the case. How this nexus interacts with the democratic process will determine how well the US will be able to defend itself against existential threats of an economic nature.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

The heights of complacency in US economic policy-making

The lawmakers in Washington DC can be expected to resort to old rigmarole in the coming weeks and waste the nation's valuable time while faced with unprecedented economic challenges. Holding timetaking discussions about whether or not to extend Bush tax cuts and whether or not to increase the debt ceiling have become periodic rituals for a political establishment that is mired in old and increasingly irrelevant divisions. On several occasions in the recent past, the Democratic Party has either capitulated to affluent vested interests or it has displayed amazing incompetence when it comes to fighting for its traditional support groups. It is not too much of a stretch to say that the Democratic Party has betrayed its traditional agenda. As far as old divisions go, what better friends can the Republicans have than the current Democrats in the Congress and in the White House ? In the last few years, the Democrats ( at least significant segments of the Democratic Party ) have either acceded to Republican demands about economic policy or they have engaged in subterfuge with their own stated principles.

The country is faced not just with short-term " fiscal cliffs ", but also long-term fiscal precipices that can create enormous problems for the economy. The small and medium scale business sectors are displaying weakness and the fiscal and monetary medicines that have been tried have failed to create the conditions for the desired levels of short-term growth and for optimism for the long-term. Let the political establishment in Washington DC not forget that the housing crisis and the financial crisis did happen in a capitalist economy where the economic decisions of many private sector players proved to be too reckless in hindsight. A further curbing of extreme laissez faire tendencies in the economy may well be needed to prevent future catastrophe. A very predictable burgeoning of the public debt to GDP ratio cannot be left to be solved by continuing the fiscal policy mistakes of the past. Compromises between traditional Republican stances on the issue and the recent feebleness of the Democrats on the issue will most likely lead to a lot of false assurances and will create the conditions for a public debt-default precipice in about a decade. Unless care is taken, the economy may well come face to face with that precipice even before that. Moreover the long-term problem of job loss and job destruction in the United States can get exacerbated if left to the mercy of market forces alone. It is time for the political establishment in Washington DC to switch gears on questions like public debt, job losses to foreign countries and weak net job growth.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Is the Affordable Care Act constitutional ?

The majority opinion in the Supreme Court of the United States which held the Affordable Care Act to be constitutional seems to have muddled certain concepts. The US government may have a right to tax individuals, but how is making it mandatory for individuals to buy health insurance consistent with American notions of freedom, especially when certain individuals will be forced to use their own money to cover part of the insurance ?

The US government imposes payroll taxes and it hands out Social Security benefits to certain recipients. However, individuals are not coerced to spend their money on a program, the way the Affordable Care Act intends to do. The constitutionality of the Affordable Care Act will probably be revisited in the future, and may form the subject of ideological and constitutional and intellectual battles in the years ahead. Even those who have left-leaning views about the economy should be wary about the constitutional implications of this Act.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Seniors under the Affordable Care Act

The supporters of the Affordable Care Act have tried to create a celebratory atmosphere around its passage and its validation by the Supreme Court. Whatever one's opinions may be about the constitutionality of the Affordable Care Act, all left-leaning individuals must be wary about what the Act intends to do about funding for Medicare. It appears strange that Medicare spending will be cut under the Affordable Care Act while a lot of the money for the Act will be obtained from Medicare tax increases. While the wealth transfer part of the provisions of the Affordable Care Act may be theoretically consistent with left-leaning views in the US, the part about cutting funding for certain seniors does not jell well with the broad thrust and the symbolism of traditional leftist legislative activism in the US. Something just isn't right when Democrats allow this kind of dilution of Medicare because of tight fiscal conditions.

It is almost as if the Democratic Party has lost coherence in the kind of legislative agendas it is pursuing and in the way it bargains with ideological opponents in the Congress. It is not yet time for the Democratic Party to pat itself on its back about the Affordable Care Act. When srcutinized carefully, it looks more like a capitulation than like an achievement.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Colonization activities in Palestine and the right to self-defense of Israel

Israel's recent efforts to invoke the right to self-defense as its justification for air strikes on the Gaza Strip should be viewed in the wider context of the Israeli-Palestinian imbroglio and must necessarily be colored by the reality of Israeli colonization activities inside Palestinian territories in the eyes of any impartial observer of the recent developments in the region. Struggles for self-determination cannot always take the form of clear-cut wars with clear-cut rules like the Geneva Convention or similar rules. Self-determination struggles often rely on tactics that do not conform to standard rules of military engagement. They often have to rely on sporadic attacks and can involve an avoidance of direct confrontation with strong occupying forces. This has been the case not just in Palestine, but in other such conflicts around the world as well.

A country that invokes the right to self-defense should not be, at the same time, carrying out activities of an imperialist nature in territories that have never belonged to it under international law. Most of the international community has accepted this reality in the past. The United States has been the one partner of Israel that has supported its actions in Palestine, illegal or not, even when they have violated standard norms of international behavior or of human rights. Recent efforts at a ceasefire in Gaza can, at the very best, buy temporary peace. The only way for lasting peace to be achieved is for a comprehensive security deal in the Middle East where Palestine's right to self-determination is recognized and followed and where Israel negotiates some kind of mutual arrangement with those powers that are intensely hostile to it. It seems Israel's ability to force military solutions in the region, whether in Palestine or elsewhere, is limited. While several sections of the international community can be sympathetic towards Israel because of the recent rocket attacks, they will also have to consider human rights in Palestine and occupation activities in Palestine while deciding their views and their strategies. All the recent round of fighting does is exacerbate existing hostilities. It does not provide a way towards security for Israel. Or the Palestinians.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Greece needs contingency planning for a variety of economic scenarios

As wrangling and head-scratching continues in Europe about the best course of action on Greece, there seems to be a paucity of contingency planning for the different scenarios that can ensue. In fact, it is not even clear what the European community intends to do about Greece if it does not accept the two-year extension for further fiscal austerity. Does it intend to stop all talks of a third round of aid money and ask Greece to implement further fiscal tightening ? If those opposed to the two-year extension get their way, what does the Greek government intend to do in such a situation ? Clearly, the fact that the government negotiated a two-year extension means that it thinks that immediate fiscal tightening needs to be avoided. However, what if such an immediate fiscal tightening becomes necessary if next week's decision about Greece is one opposed to the two-year extension ?

It seems Greece needs a set of strategies designed to match different scenarios regarding GDP growth ( short-term, medium-term and long-term ), tax revenue fluctuations, willingness of the rest of Europe to lend money under specific scenarios, willingness of the IMF to lend money under specific scenarios etc. The worst-case short-term scenario for Greece is one where no further aid money flows in due to disagreements about the economic merit of such aid, due to the unwillingness of different parliaments to approve aid money etc. It should be possible to avoid this worst-case scenario, where Greece is left completely to itself, if those who have a stake in Greece's future take all possible consequences into account while deciding their actions. For example, European countries need to take into account the fact that leaving Greece to its own fiscal and economic resources in the short-term can trigger a bout of instability that the European economy and the world economy should try to avoid at all costs. Although no one is talking about stopping aid to Greece altogether, Greece needs to create contingency plans for such a situation which can lead to exit from the Eurozone, hyper-inflation, failures of banks in Greece etc.

The ripple effects on banks in the rest of Europe, on the trade volumes of Greece's trading partners etc can be devastating for Europe and eventually for the global economy. Given the possible devastating short-term and medium-term impacts of leaving Greece entirely to its own on Europe and on the global economy, it makes sense to provide the requisite amount of aid to Greece till it reaches the right combination of internal fiscal and economic stability. Short of this worst-case scenario, details like the timeframe of budget adjustments, the combination of taxes and spending levels etc need to be considered. What countries like Germany and France need to realize is that questions like timeframes for fiscal adjustments and for reaching specific debt-GDP ratios are economic questions first and political questions next. At this historic juncture for the European and for the world economy, it will be the height of stupidity for European countries to put politics ahead of economics. German taxpayers and taxpayers in other countries need to be educated by their economists and by their politicians that extending financial aid to Greece from their own money can make perfect economic sense given the integrated nature of the European and the global economy. It is imperative that short-term political considerations are not allowed to cloud sound economic reasoning given the delicate state that the European economy and the global economy find themselves in.

As for the right combination of taxes and spending, this is again an economic question that needs careful analysis based on the country's revenue structure, spending programs etc. Those who may want to put more emphasis on spending cuts and less on tax increases for achieving lower deficits in Greece would do well to realize that the rich, the high income earners and the large-profit-makers should be expected to make some sacrifices for Greece's austerity programs. Greek policy-makers should be able to come up with frameworks where taxes are imposed on employers making good profits and adequate provisions are made for employers struggling to make profits. Letting the burden of austerity fall on the spending side alone can create unwanted economic consequences and socio-economic instability. By not letting tax increases absorb some of the shock of austerity, conditions may get created where large sections of the population are left without basic welfare provisions and where the aggregate demand may change in a way that has adverse effects on the economy. Clearly, the details can be complicated and can vary from country to country. But mere ideological opposition to letting some tax hikes be a part of austerity programs, as opposed to dispassionate economic analysis, can lead to severe problems in the short run and in the long run. Greece needs serious economic analysis in this area. Fiscal projections, GDP projections, sectoral GDP projections etc under different tax-spending combinations and under different external aid combinations need to be arrived at. Given the fast-changing nature of economic developments in Greece and in Europe, no one should expect this to be an easy task. However, it should be possible to make projections that are reasonably accurate and robust. The extent to which Greece is able to come up with good projections about these aspects of the economy may well decide the short-term and long-term economic well-being not only of Greece, but also of the rest of Europe and possibly of the world as well.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

What US inflation hawks should know about the term " unprecedented situations " and what QE proponents should be careful about

One should expect unprecedented economic situations to lead to unprecedented economic policies. For the most part, the US Federal Reserve didn't create the Great Recession ( the Greenspan Fed may have contributed to the real estate bubble in some measure, but one should keep in mind that it is difficult for Fed policy alone to create asset bubbles like real estate bubbles if most economic agents are acting " rationally " most of the time. Also, the Greenspan Fed may have had other valid justifications for its interest rate policies ). It responded to it. The Great Recession has similarities with the Great Depression, but it isn't the same as the Great Depression. There is nothing in economic science to provide exact guidance for Fed policies during these difficult economic times.

Those who swear by rigid anti-inflationary principles ( http://www.bloomberg.com/news/2012-10-31/bernanke-depression-guru-seeks-roosevelt-well-being.html ) would do well to realize that these are indeed unprecedented times. This article is not trying to defend specific asset purchases of the Fed. For example, excessive purchases of mortgage-backed securities during QEs, as opposed to buying more Treasuries worth the same value, is indeed a risky game. And it should be scrutinized carefully. What this article is trying to say is that inflexible anti-inflationary stances are ill-suited during deep recessions and during long bouts of high unemployment.

As for the exact mix of securities that the Fed bought for its QE operations, that is something that experts need to think seriously about. Were all the QEs necessary ? Possibly. Were all the purchases of mortgage-backed securities for these QEs necessary ? That is a difficult question to answer. Can the US economy embark on a high-GDP-growth and an inflationary trajectory while the housing market is still down ? Or is the recovery of the housing market a sine-qua-non for inflationary pressures to build up in the US economy ? Once again, this is a difficult exercise in economic prognostication that requires serious research. Let it be said though, that if inflationary pressures build up without a corresponding recovery in the housing market, the MBSs held by the Fed will most likely not command much market value. To that extent, the Fed's ability to rein in inflation will be compromised in such a situation. This possibility of the inability of the Fed to have sufficient amount of effective assets to sell in case of inflationary pressures is something that monetary policy needs to contend with. Let it also be said that the European Central Bank's long-term-refinancing-operations may also leave it in a situation of weak control over prices if inflationary pressures build up. Both the US and the European monetary systems are dealing with new economic realities. The policy makers in charge of these monetary systems are learning many crucial things along the way. In the US, GDP growth is beginning to falter although it recovered to some extent after the GDP contraction during the Great Recession. The small business sector has shown persistent weakness. Even big corporations have been having difficulties. Why haven't the QEs led to more investment spending and more consumption spending than what we have seen ? What effect have the QEs had on activities in the credit market ( as regards rates and amounts of lending and borrowing and the quality of new credit in the economy ) and what effects are they likely to have in the credit market in the future ? These questions about the links between QEs and possible economic recovery need to be answered if we are to reach a better understanding, not just of the recent economic crises, but also of appropriate responses to possible future crises with similar causal factors and similar mechanisms.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )