Nice try, All Those Central Banks

Nice try, federal reserve, European Central bank, Bank of Japan and Bank Of Canada.

Today these central banks planned to pump $247 billion into the financial system and regulators cracked down on abusive speculation against bank shares.

Russia and China will act too. Russia and China took steps to stanch declines in their stock markets. Russian President Dmitry Medvedev said the government will spend 500 billion rubles ($20 billion) to support the shares. China will scrap the stamp duty on stock purchases and buy shares in three of the largest state-owned banks to shore up investor confidence, the official Xinhua News Agency reported.

As a person who studied economy, here i will explain to you why this step won't work.

Under normal circumstances, a slowdown in economy required central bank to apply the expansionary monetary policy, which mean lower the interest rate and increase the money supply to stimulus the economy and increase the growth of the gross domestic product(GDP) and decrease the unemployment rate.

However, the circumstances now are not normal. We are not just encounter a economy slowdown problem but also high inflation rate problem. When these two problem occurred together, we call it a stagflation.

According to Alban William Phillips, a New Zealand-born economist, there is an inverse relationship between money wage changes and unemployment.He proved the theory using data from a lot of countries. In 1960, Noble Laurette Paul Samuelson and Robert Solow took Phillips' work and made explicit the link between inflation and unemployment: when inflation was high, unemployment was low, and vice-versa.

All those central banks increase the money supply will no doubt increase the GDP and lower unemployment rate, but it will also increase the inflation rate. As we all know the inflation rate of countries all over the world is already at a very high level, another increase in the inflation rate will make the inflation rate even higher. He call a very high inflation a "hyperinflation" just like the problem those South America Countries is facing now. Not only that, a high inflation rate will decrease the value of the currency of that particular country.

According to economist, inflation rate is so much harder to control compare to GDP and unemployment. So they suggest if both problems exist, we should deal with high inflation rate first before solving the Slow GDP growth and high unemployment problem.

However, those central banks are try to do the opposite thing, they try to solve the slow growth of GDP and high unemployment rate first before the high inflation rate. Yes i admit they may succeed in solving all those problems but at a much higher cost. Furthermore maybe by the time they succeed in solving the GDP and unemployment problem, the inflation problem already go to the level when they won't be able to control. By that time, the US economy may be as weak as Argentina's or Bolivia's. The Currency of US will be fallen to hell and like Don Harrold said, American may need a bag load of dollar to buy a bread. Soon the world economy will also badly affected.

These central banks are taking the actions that is too risky for all the normal citizen like us. If they succeed, our life won't change much unless you are a wall street trader or owner of a large company, but if they fail, we as a normal citizen will suffer the most while those rich people continue to live their life.