Money , Inflation and Government.
Money is a medium of financial transaction , with the help of which we can buy goods and services , conduct trade and a form in which we perhaps earn our living.
Wikipedia defines it as below , you can skip it .
"Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context.The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment Any item or verifiable record that fulfills these functions can be considered money."
Who controls the supply and distribution of money .
The central banks (and governments via central banks ) control the supply of money and the banks ( private or public depending on the country) , control the distribution by giving loans to individuals and businesses and other complex financial transactions.
Now let me ask a question ,
Which country prints more money among below ? (Ever heard of -QE )
a) USA
b) UK
c) INDIA
d) Japan
.
.
.
.
ANSWER:
Many would of have thought USA as the answer as dollar is the reserve currency and i mentioned QE , i mentioned it simply to confuse you.
It's INDIA .(Among these 4 )
This is the screenshot of data taken from world bank .It gives the annual increase in money supply ( money printed or created digitally ) in percentage terms for each country .
For 2013 ,the increase in india was above 13% ( Checked from RBI website)
Many indians , dream about working in foreign countries , the advantage (for most people ,some go for technical reason or passion other than money too) - they can earn in a strong currency , which can be converted to bigger amount in a weaker currency .eg) Earn in dollars , spend in rupees .
In 2008 1$ = 44 INR , in 2014 1$=62 INR.
Is this is a bad thing ?
Not necessarily .Not unless you can produce all the things , a country consumes -food ,electronics,automobiles and resources like petrol etc or import less than you export .
India imports more than it exports which causes CAD ( will explain in detailed in separate post) and which further WEAKENS our CURRENCY, the rupee.
Ok , is it only a problem for import ?
How about say consuming only local produce .We don't have enough natural resources in fossil fuels.(Import essential). We grow enough rice and wheet in india for indian consumption , that should not be affected right ?
But still ...!!!
Excess money supply causes a far bigger danger - INFLATION , the silent tax.In india CPI inflation is consistently above 10 % in past few years.(Src-tradingeconomics.com), inflation of goods and services involving manual value addition will be even more. eg) Processed food cost , college tuition , health services etc and not everything is covered in inflation standard but only most consumed items included.
As inflation rises, every rupee will buy a smaller percentage of a good.
For example, if the inflation rate is 10 % , then a 10 RS chocolate candy will cost 11 Rs in a year.
So in case of india , beside other minor causes like monsoons , hoarding , increase in price of essential imports like crude oil , The major cause of inflation is INCREASE IN MONEY SUPPLY running above 12% .
We cannot have a low inflation in such a scenario .This is what we call a structural issue in Economics.
What causes this ?
Government deficit(or Fiscal deficit). A deficit is created when a government spends more than it earns in a year.Both central and state government have deficits.
Government earns via direct and indirect taxes.
The deficit is covered by central banks by increasing money supply .
The increased money supply results in inflation after a certain delay due to time taken by new money to circulate in the economy or country.
So can this be prevented ?
Unfortunately not. In modern industrial society and financial system , we need increase in money supply to help in economic growth in a an economy or country.
And the problem is multiplied in developing countries like INDIA .In developing countries , we need to build more infrastructure like roads ,schools,hospitals ,factories and other entities to empower the citizens ,provide goods and services to them.So we need to increase money supply faster than in developed countries .
It looks like a genuine cause , is there anything we are missing ?
Yes we can't prevent increase in money supply . But we can MANAGE BETTER , how it is utilized .
If the money supply increases in line with growth of production (GDP will explain in another post in detail) , inflation will be minimal and low .
eg)If the increased money goes to build infrastructure and enable more production.
When the money supply is not directed at expenditure that can improve production but at other expenditure which may not improve production , growth will be less, inflation will be more .
Other expenditure can be wasteful like giving freebies or subsidising consumer goods /consumer imports or sub-optimal like building an airport at a location where people cannot afford taxis.There are lots of examples of wasteful expenditure in today's india.
eg) Giving consumer electronics freebies to people when many children don't get primary education.
Giving subsidies via schemes with lots of leakages where poor do not benefit while skill based training is not given to youth needing jobs
This is how food and vegetables prices , education and health care prices are consistently high in our country.
So who is responsible to fix the inflation , the central bank , the government , someone else?
The central bank cannot order the government to spend judiciously and under limits.
The government controls the money supply indirectly via it's expenditure and deficits.
BUT THE POLICIES OF GOVERNMENT , DECIDE THE QUALITY OF EXPENDITURE AND PROGRESS OF NATION AND INFLATION.
THE SUPPORT OF PEOPLE FOR GOOD POLICIES WILL ENABLE GOVERNMENT TO ADOPT GOOD POLICIES.
If, we people support bad policies like freebies or policies favoring an individual or group at the cost of nation, ultimately we will suffer at the end with inflation.
So , In a democracy , people and government decide the direction of nation.
So my friends, whenever you hear a promise of a freebie or benefit , please think of welfare of country , indirect cost of inflation.
eg)A free tv government will increase the price of food and fuel we use!
A lot of nations with less resources than india have developed by hard work of people and good policies , we too can become one.
Please spread the knowledge.
Will come back with an article on more need to know issues.
References : ( For the data lovers )
1)http://dbie.rbi.org.in/
2)http://data.worldbank.org/indicator
3)http://www.tradingeconomics.com/india/indicators
4)http://www.tradingeconomics.com/india/inflation-cpi
Other causes for money suppy increase .
Another issue in recent decades is planned currency depreciation (by increasing money supply) by some nations to increase their export competitiveness. (This is called currency war which has led to serious crisis in past in world history ). So if other countries producing and exporting same products as india devalue their currency , india will be forced to replicate the same to preserve trade competitiveness and trade balance.(More in a separate future post ).This is a external but inevitable cause in a global economy.
This seems to be happening today in world, by means of fiscal stimulus by central banks around the world to kick start growth of developed countries and recapitalize financial institutions in bad shape , restore growth to countries under debt in current recovery from 2008 crisis which is very dangerous and hope does not get more widespread.(Will discuss in detail in future posts)
Money is a medium of financial transaction , with the help of which we can buy goods and services , conduct trade and a form in which we perhaps earn our living.
Wikipedia defines it as below , you can skip it .
"Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context.The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment Any item or verifiable record that fulfills these functions can be considered money."
Who controls the supply and distribution of money .
The central banks (and governments via central banks ) control the supply of money and the banks ( private or public depending on the country) , control the distribution by giving loans to individuals and businesses and other complex financial transactions.
Now let me ask a question ,
Which country prints more money among below ? (Ever heard of -QE )
a) USA
b) UK
c) INDIA
d) Japan
.
.
.
.
ANSWER:
Many would of have thought USA as the answer as dollar is the reserve currency and i mentioned QE , i mentioned it simply to confuse you.
It's INDIA .(Among these 4 )
This is the screenshot of data taken from world bank .It gives the annual increase in money supply ( money printed or created digitally ) in percentage terms for each country .
For 2013 ,the increase in india was above 13% ( Checked from RBI website)
Many indians , dream about working in foreign countries , the advantage (for most people ,some go for technical reason or passion other than money too) - they can earn in a strong currency , which can be converted to bigger amount in a weaker currency .eg) Earn in dollars , spend in rupees .
In 2008 1$ = 44 INR , in 2014 1$=62 INR.
Is this is a bad thing ?
Not necessarily .Not unless you can produce all the things , a country consumes -food ,electronics,automobiles and resources like petrol etc or import less than you export .
India imports more than it exports which causes CAD ( will explain in detailed in separate post) and which further WEAKENS our CURRENCY, the rupee.
Ok , is it only a problem for import ?
How about say consuming only local produce .We don't have enough natural resources in fossil fuels.(Import essential). We grow enough rice and wheet in india for indian consumption , that should not be affected right ?
But still ...!!!
Excess money supply causes a far bigger danger - INFLATION , the silent tax.In india CPI inflation is consistently above 10 % in past few years.(Src-tradingeconomics.com), inflation of goods and services involving manual value addition will be even more. eg) Processed food cost , college tuition , health services etc and not everything is covered in inflation standard but only most consumed items included.
As inflation rises, every rupee will buy a smaller percentage of a good.
For example, if the inflation rate is 10 % , then a 10 RS chocolate candy will cost 11 Rs in a year.
So in case of india , beside other minor causes like monsoons , hoarding , increase in price of essential imports like crude oil , The major cause of inflation is INCREASE IN MONEY SUPPLY running above 12% .
We cannot have a low inflation in such a scenario .This is what we call a structural issue in Economics.
What causes this ?
Government deficit(or Fiscal deficit). A deficit is created when a government spends more than it earns in a year.Both central and state government have deficits.
Government earns via direct and indirect taxes.
The deficit is covered by central banks by increasing money supply .
The increased money supply results in inflation after a certain delay due to time taken by new money to circulate in the economy or country.
So can this be prevented ?
Unfortunately not. In modern industrial society and financial system , we need increase in money supply to help in economic growth in a an economy or country.
And the problem is multiplied in developing countries like INDIA .In developing countries , we need to build more infrastructure like roads ,schools,hospitals ,factories and other entities to empower the citizens ,provide goods and services to them.So we need to increase money supply faster than in developed countries .
It looks like a genuine cause , is there anything we are missing ?
Yes we can't prevent increase in money supply . But we can MANAGE BETTER , how it is utilized .
If the money supply increases in line with growth of production (GDP will explain in another post in detail) , inflation will be minimal and low .
eg)If the increased money goes to build infrastructure and enable more production.
When the money supply is not directed at expenditure that can improve production but at other expenditure which may not improve production , growth will be less, inflation will be more .
Other expenditure can be wasteful like giving freebies or subsidising consumer goods /consumer imports or sub-optimal like building an airport at a location where people cannot afford taxis.There are lots of examples of wasteful expenditure in today's india.
eg) Giving consumer electronics freebies to people when many children don't get primary education.
Giving subsidies via schemes with lots of leakages where poor do not benefit while skill based training is not given to youth needing jobs
This is how food and vegetables prices , education and health care prices are consistently high in our country.
So who is responsible to fix the inflation , the central bank , the government , someone else?
The central bank cannot order the government to spend judiciously and under limits.
The government controls the money supply indirectly via it's expenditure and deficits.
BUT THE POLICIES OF GOVERNMENT , DECIDE THE QUALITY OF EXPENDITURE AND PROGRESS OF NATION AND INFLATION.
THE SUPPORT OF PEOPLE FOR GOOD POLICIES WILL ENABLE GOVERNMENT TO ADOPT GOOD POLICIES.
If, we people support bad policies like freebies or policies favoring an individual or group at the cost of nation, ultimately we will suffer at the end with inflation.
So , In a democracy , people and government decide the direction of nation.
So my friends, whenever you hear a promise of a freebie or benefit , please think of welfare of country , indirect cost of inflation.
eg)A free tv government will increase the price of food and fuel we use!
If you buy things you don't need, you will soon sell things you need.- Warren Buffett
Our government borrows money from international organisations to implement schemes , sometimes giving rights to operate in our markets , or selling some natural resources from our country or for future interest payments. If its is not spent usefully ,we will suffer the consequences in future.A lot of nations with less resources than india have developed by hard work of people and good policies , we too can become one.
Please spread the knowledge.
Will come back with an article on more need to know issues.
References : ( For the data lovers )
1)http://dbie.rbi.org.in/
2)http://data.worldbank.org/indicator
3)http://www.tradingeconomics.com/india/indicators
4)http://www.tradingeconomics.com/india/inflation-cpi
Other causes for money suppy increase .
Another issue in recent decades is planned currency depreciation (by increasing money supply) by some nations to increase their export competitiveness. (This is called currency war which has led to serious crisis in past in world history ). So if other countries producing and exporting same products as india devalue their currency , india will be forced to replicate the same to preserve trade competitiveness and trade balance.(More in a separate future post ).This is a external but inevitable cause in a global economy.
This seems to be happening today in world, by means of fiscal stimulus by central banks around the world to kick start growth of developed countries and recapitalize financial institutions in bad shape , restore growth to countries under debt in current recovery from 2008 crisis which is very dangerous and hope does not get more widespread.(Will discuss in detail in future posts)
