When Money is just created out of thin air, at a stroke of keyboard, and infused into a bank and when govt borrow it (capital reciepts) to meet its revenue expenditure to pay salaries of its employees, most of which do not add any wealth (production of commodities) to the economy, a real wealth earner in the economy such as a farmer looses and robbed of his money. Because these unproductive people compete with the productive people for the same amount of supplies. This creates inflation.

Printing of money devalues the currency’s buying power like adding water to milk
. Govt injects this additionally created money (out of thin air or at stroke of keyboard) in the banks which are public sector entities and are in government control. Then government borrows this same money from the banks to meet the revenue expenditure or paying salaries to its employees. Note that government borrows heavily to meet even its revenue expenditure which is just consumption unlike capital expenditure which is done to generate incomes. A higher revenue expenditure means less capital expenditure. And when by way of high revenue expenditure this additionally printed money is distributed to unproductive service class, people who produce for the economy looses as while they have to toil hard to make a claim to money others gets it without contributing to their share of hardwork in benefit for those who are producing. Not only unequal distribution makes the real wealth generators poor by robbing them of their hard earned buying power, it discourages people from production. Why would somebody need to toil in the fields when buying power or claims to commodities can be earned through easy means? Money is being multiplied out of it while commodities do not because the later is a result of hard work. Commodities is the real wealth while paper money only represents it. Creation of cheap money and then giving claim to demand to unproductive service class only creates several moral hazards ranging from corruption, crime, other social problems to the more sophisticated ones like gambling in financial markets that turns the whole economy into a casino economy where real wealth is not created but only redistributed. Remember service class no matter how essential it is, consumes and do not produce. It is meant to serve the producers for better production and when it does not achieve that objective it is a burden on the producers of the economy.

Higher borrowings by government also makes less money available in banks for capital investment by private sector. Not only this govenment tries to avoid a high interest regime even though it becomes an economic necessasity. This is because higher interest rates increases the interest liabilities of government thereby increasing the cost of borrowing. The continuation of lower interest rates than what an economy requires further leads to inflation. No wonder why our revered prime minister suddenly realises that he is not an astrologer. It require no evidences that the babystep rise in interest rates have proved completely ineffective in the last one year when inflation have only increased despite of several assurances.

Printing of money also discourages savings. So even if one tries to save through conventional methods of fixed deposits, he tends to loose as while his quantity of money increases only by interest rates, the buying power reduces more as interest rate is almost always less than actual yearly inflation percent Constant inflation discourage people to save and inturn there is no capital to invest in productive purpose. Debt based consumption is even dangerous because it implies that current prosperity is at the cost of future pains because debt has to be repaid with interest.

Lets quickly see 4 imp Indian economy indicators:
1. Interest liabilities=25% of revenue reciepts. This implies a higher interest rates will mean more interest rate liabilities for government. If they print more money to monetize the debt, it will create more money supply and more inflation inturn. Because while interest rates is meant to suck the money from the system, more money supply does just the opposite i.e., add money to the system.

2. Debt to GDP =80% of GDP. When government borrows heavily to spend, GDP goes up because future payments or debt are not considered in GDP and as debt enables higher spending by government, it increases the GDP.

3. Foreign exchange reserve=external debt. When the nation is not producing enough to meet its internal demand and export the surplus and the rich who are the beneficiary of the unequal distribution of money starts spending to import without any restriction, trade deficit widens and external debt increases.

4. Money supply is growing in the economy at a rate of 16% to 19% which only devalues money. Measuring any indicator like GDP on this downward going scale will only present a misleading picture. No wonder why the governments prefer to change the base year of inflation, so that inflation is hidden from the people and they are able to show misleading figures.

If we adjust our indicators which are measured in terms of money, to inflation or devaluation of money then we are measuring our growth on downward going scale(because the value of money is constantly going down) and since the govenrment misleads people by constantly changing base year to adjust these indicators to inflation, the most important questions is are we really growing as we are told?

One should take it as a warning that Inflationary nightmare is awaiting us as the govenrment is keen on growth which is only the growth of money and not of the commodities which people consume.


Comments on: "Growth of paper money is not growth of economy." (1)

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