The Question of Battling Poverty by Printing More Money

(Source: GaryK)

For many people, one stream of thought that seems very logical, but has never been implemented in real life is the question: “Why can’t we just print more money and give it to poor people?” Let’s explore the life of the momentarily fictional now-rich poor.

If the government printed more currency and gave them to a specific section of the poor people, then yes, they’ll become rich. But on more rational terms, let’s assume that the government has decided to print currency on a massive scale and distribute Rs. 100,00,000 to every poor person in India. But extension, a lot of middle-income people would now be relatively poor. Hold on to that thought for a second.

The now-rich poor will start buying up everything they can with their new-found wealth. The prices of goods and services in the economy will shoot up. If the consumption (Or demand, by extension) crosses the total production of the country, then we will have an even bigger problem in our hands. Lack of supply will further drive the prices up.

And the producers aren’t fools. They know that these people have a lot of disposable cash in their hand. So, they will increase the prices of their goods multi-fold for what it is worth. A loaf of bread will be sold for, say Rs. 100, instead of Rs. 20 because the now-rich poor can afford to pay that much now. The same is the case with other necessities and luxuries: bikes, cars, housing, clothing, saloons everything gets costlier. So earlier the Rs. 100 note was able to buy them 5 loaves of bread. But now, they can buy only one. The purchasing power of a Rs. 100 has effectively decreased five-fold.

Give this phenomenon enough time and it will give rise to a monster of an economic effect called the hyperinflation. Hyperinflation is characterized by massive rise in prices of goods and services (In our example, the Inflation of Bread is be 1900%). In hyperinflation, currency has little to no value and depending on the size of the hyperinflation, even a million dollar note can by only a handful of necessities.

In fact, you’d be surprised to know that this has happened already, hundreds of years ago. Mansa Musa (Sultan Musa) was a rich African king of the 14th century. During his pilgrimage to Mecca, he started donating gold to the cities he went through. He donated so much so that the precious metal was devalued for the next decade and there was mass inflation everywhere. For years, he slowly purchased as much gold as possible with a high premium (More about him in a later blog post) just to get rid of the inflation. As the Father of Modern Economics J. M. Keynes put it “Economics is a very dangerous science.“

This article was written by Dinesh Sairam (PGDM, Batch 21, XIME-B)

The Economics of a Religious Ritual

India is a very religious country. As such, there are numerous religious rituals involved. Once such religious ritual is throwing coins into ponds located within a temple. In the non-religious parlance, this can be related to throwing coins into fountains and wells for luck. How do the wasted coins affect the economy? Does the economy become poorer for all the lost wealth? Well, not quite.

(Source: www.democraticpaper.com)

Imagine that there is a lunatic out on the loose whose sole purpose in life is to steal money from people – and burn it. Now he has successfully burnt down all but Rs. 100 worth of money in the hands of every single person in the country. Imagine now what would be the likely effect on the economy. There will be deflation, heck, depression.

People will not spend at all. They will guard their Rs. 100 with their life. They will spend it sparingly, only for food and other necessities. The prices of all other goods and services will crash. Businesses will shut down. If at all some business remains operational, their good or service will be sold at a very marginal rate. Dresses will sell for Rs. 10 or so, cars will sell for Rs. 1000 and so on (Okay, not really, but at least in theory).

Putting aside the destruction and despair, think for a moment what happened to the value of money. Before the lunatic, you could get a Lay’s chips for Rs. 10, but after the fiasco, you are able to get a dress for the same amount. The value of money increased multi-fold.

This is the economic impact of what we call ‘money burning’ in Economics. When you burn money/throw it away, you make everyone else using the same currency richer by a very, very, very tiny part. In the long term you also become richer, but of course you become immediately poorer if you burn your money/throw your money away.

For those of us economically inclined, the Quantity Theory of Money establishes exactly this. Although there are some strong critics of the theory, it holds true. Otherwise, Central Banks across the world would not have ‘controlling money supply’ as one of their major motives.

Before you try this experiment for yourself, note that destroying money is a punishable offense is most countries. This is due to the fact that money is not something you own. Money is simply an instrument created by the government to represent what you own aka your wealth. But at least, the next time you throw away a few coins into a pond, pause for a second and realize how you’ve made your country richer by a teeny-tiny part.

This article was written by Dinesh Sairam (PGDM, Batch 21, XIME-B)

A Message from the President

It seems to me like only yesterday I sat in that shabby hostel room where I was interviewed by my Seniors for becoming a Junior Representative of Finitiative. In the same vein, the final ‘handing-over-the-torch’ talk our Seniors gave us in the Eastern Lawn, just after Finitiative’s Valedictory Ceremony, is still fresh in my memory. The reality still has not set in that I have become a Senior Representative now, let alone the President of the club. But as the saying goes, life is what happens when you’re busy doing something else.

It is one of my pet peeves when people diss the concept of money (You know, the philosophical, hypocritical types). After all, money is only a means to an end. I always tell them “Managing your money efficiently does not guarantee a peaceful life. But it gives the freedom to decide if you want one.” Ironically, many people who claim that they don’t make their life about money, are exactly the ones who disregard money management and end up in the rat race. Then they blame the society and the government for making them poor. Charity begins at home and good money management begins with the self. Although the words used by him are harsh, Albert Camus hit the nail in the head when he said “It is a kind of spiritual snobbery that makes people think that they can be happy without money.”

Finitiative has, in the past, and will in the future continue to look for people who accept the reality that money has become an important part of our lives – whether or not we like it. Through its activities, Finitiative will equip its members, first and foremost and its participants with the right tools on their journey towards what is broadly termed as ‘financial freedom’ – the ability to take a pro-active control of one’s life. In this sense, as Gordon Gekko puts it, “Greed — for lack of a better word — is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.” Let us all be benevolently greedy.

To reiterate the sincerity of its past members, note that Finitiative was envisioned by our Super Seniors only as late as 2012. In a very short span, the people who dedicated themselves to it, including us (luckily), have elevated it to enviable levels. Yet the basic motto of the club remains the same: “Finance is fun”. For the coming academic year 2016-17, we are looking to attract a group of fervent individuals who share our enthusiasm for money matters and are ready to spread the moolah mantra. Of course, it won’t be easy – we will face a lot of difficulties. We’re in for a bumpy ride, but we’re in it together.

This article was written by Dinesh Sairam (PGDM, Batch 21, XIME-B)