INQUIRER Global Nation

When the economy heats up and inflation is rising fast the usual response of most central banks of the world is to tighten money supply to drive up the rate of interest and discourage more investments or consumption. When the economy slows down and joblessness inches up, they do the opposite, that is ease up money supply to drive down interest rates and encourage more investments and consumption. Under normal circumstances this works especially if the expansion or contraction in money supply is done at a sufficient level at the right moment. But this is not always the case as shown with what happened in the recentl global slowdon that comes with the financial meltdown or credit crunch arising from the collapse of the housing sector in the US.

When the slowdown or recession was eminent and as banks refused to give or became more cautious in giving loans to business and consumers, most central banks of the world were one in cutting down their lending rates and supplying more funds into the financial system to revive credit. So far, however, we find all their moves ineffective as they did not stop the global economy from actually receding that continues up to this time. That is how serious the problem is so that most governments of the world are now prompted to undertake more direct measures to expand their economy by increasing expenditures or decreasing taxes to pump prime the economy.

Why is central bank action to pump prime the economy not enough to prevent or stop the slowing down of the economy this time? The answer is obvious. When business prospects are so bad during a recession, no amount of prodding by the central bank will force the banking system to lend more just as no amount of interest rate reduction may entice business people to invest more. Meanwhile, finding that jobs are scarce and their income no longer secure becasue of bad business prospects, consumers may decide this time to hold on to their money longer by spending less or saving more in contrast to their free spending ways before. Such is the case today in the US with the reported increase in new bank accounts being opened.

Saving more or buying less is the usual and most natural thing to do when we lose security or feel insecure with our jobs or income. But as we do, we may actually create more damage to the national economy and prolong, if not deepen the recession. For as we save more and spend less, business will also continue to slow down, prompting many firms to further cut production and employment.

In fighting recession, it is interesting to see why when central bank actions fails to stop the recession, it becomes necessary for the government to intervene directly into the economy by spending more or cutting taxes. The reason is that like consumption and investments, government expenditures comprise part of the aggregate demand in the economy. When aggregate demand expands, production and employment will also expand. But when consumption and investments are slowing down and nothing is done by the government to compensate for them, the whole economy will also slow, causing jobs and income to be lost and for the economy to hasten its downward motion.

Actualy, when nothing is done, eventually the downward motion will stop but we cannot be sure when it will stop and how deep the cut in production, employment and income will be. What is sure is that when jobs and income are cut many people will suffer and that is what should concern us all and that the government to do something about it finally.

Like most governments in the world, our own government talks of pump priming the economy to minimize the impact of the global recession. The trouble with government pump priming is that it may take some time for government action in the form of new programs s to be planned, funded, and executed and for their result or impact to be felt by the people.

Thus, we cannot really be sure if the feared deepening of the recession this year will reverse itself before the year ends as many of us would like to hope. Short of the efficient and fast moves to translate government intention into action to pump prime the economy, we may still end up, like the rest of the world, in a slump for much longer time than we expect.

Indiviudally, we must be ready for this eventuality and the only way for us to minimize the impact of the slump, is for us to become more productive in whatever we do at present if we are still employed or to get more knowledge and skills to prepare for employment when better times retrun.