Pump Priming And it’s Impact on Inflation And Currency – A Study of China, India And The USA

Pages: 223

Language: English

Published on: Apr 11, 2020

Publisher: Idea Publishing

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China uses pump priming to stimulate its economy, however sterilization, which involves the control of money in circulation to tackle inflation, enables China to ensure that pump priming does not have a negative influence on the long-term performance of the economy. Further, since China is an export-based economy, the country is able to implement monetary and fiscal policies that reduce the expansionary pressures of pump priming on the economy. China is facing a backlash from various countries especially the U.S. forcing it to stabilize the value of the Renminbi.

In India, the expenditures are disbursed through ministries of the central government to the state governments to facilitate the achievement of a certain objective. Therefore, it is pertinent to claim that the plans detail the pump priming initiatives that India would use during a specific period. However, the impact of the same on currency and inflation in India is just a one-time event and not a continuous one like in some other countries. India’s fiscal budgeting system poses a threat to the economy. The budget of the central government creates a debt trap. It is inflexible due to politically irreducible commitments made by the government on provision of subsidies, and various freebies. Further, the state governments depend on the cash transfers and grants provided by the central government and add to this their own share of subsidies and freebies. This results in a limited focus on revenue generating assets.

In the USA, President Roosevelt advocated the use of pump priming to tackle the depression. This involved providing direct financial relief to the poor to enable them to make their purchases and this to a large extent brought the Great Depression to an end. Further, as a second measure, a raft of measures, policies, and programs were put in place which brought considerable economic relief to common households. Prior to Roosevelt, President Hoover, to tackle the Great Depression, ensured the creation of the Reconstruction Finance Corporation (RFC) which provided financial support to state and local governments and also provided loans to railroad projects, banks, and other businesses to prevent them from going bankrupt.

Among all recessions, the 2008 financial crisis is regarded as the worst since the Great Depression. The onset of financial crisis caused President George W. Bush’s administration to pass a $152 billion stimulus package in the form of tax rebates in 2008. It was amidst this financial crisis that President Obama took over and his administration allocated $787 billion to tackle the fallout from the financial crisis. The conventional stimulus package that targeted the real economy was slightly more than $1 trillion. The unconventional measures that provided direct assistance to the financial sector via TARP I and TARP II allocated three times the fiscal stimulus that targeted the real economy, that is, $3 trillion.

At the end of the financial crisis, most parties acknowledged that pump priming did play a major role in improving public confidence and that the impact of the fiscal policy on the economy is dependent on the country or situation.