Why can’t a country print money and get rich?.
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While the worst may be behind us, it is always looming. Apart from super billionaires, everyone would be on same platform. While it sounds awesome in the first place, but would probably lead to massive loss of productivity. Something similar to what happened when Idi Amin made all Asian business owners leave Uganda, leading to total chaos and industrial collapse. Just makes me wonder. So in fact, this action would lead to loss of productivity due to hyper-inflation and forced, unproductive socialism.
So, for the product which you paid Re. But you said people will demand 50 units for the same price. I think people will be willing to pay more for the same quantity say Rs.
Only when people pay more for the same quantity, the companies will take it as an advantage and increase the price which will then cause the inflation to increase. Thanks for the lucid explanation Manshu. Nice article on supply and demand. My question is, what happens in reality with Quantitative Easing? If the new money printed goes into only a little percentage of the population, are they richer now?
The new money comes into banks, and theoretically they should find it easier to lend out to other individuals so terms of credit should become easy. However, in reality, this may not always happen. I disagree with you that if you have more money your consumption or demand of certain things also rise. No one buys the same thing again and again if not required. Bank are primarily involved in Usury, Money is deliberately kept out of reach of the masses so that handful of can use it and become more rich.
Some vested interest create artificial demands to increase prices of their products such as builders in Bombay.
Govt should print money as much as it is required by the common man. There will be no inflation for a long time to come. Manshu solved my misconception…. Manshu you solved my misconception…. Thanks a lot for the informative post. Can u elaborate on the query asked by saran…if a govt prints more money.. In this way, there will be no inflation worries also…please explain. External debt is usually held in a foreign currency and a very good example to understand that right now is Greece.
The more money will increase the spending of persons, and the demand will increase, If supply is not enough then to earn more profit company will increase the rate. But I think that will be a short term inflation due to mismatch in demand and supply. To overcome this or to avoid it from a long-term inflation, company can increase the supply so price will be same and increasing supply will require more man power which can reduce the unemployment problem.
I am not a management student nor a commerce student but If I can conclude a solution for inflation why others can not? The issue is that supply is rather limited even in the long term. If people had thousand times the money they had today just in the form of currency notes — how long will it take to produce thousand times the milk or cement or computers or anything at all? Well I think this can not be an ideal case. If we think in Ideal terms then Increasing money thousand times will not increase the demand of same thing by thousand times.
I agree it can be increased by twice or thrice for the same product and few new demand will be introduced for some new products and these demand can be supplied after short term inflation. Lets take an example:. When demand turned high, they increased the price due to less supply, and they gained more profit. They are still selling on high price to get more profit. Now the question is who would like to go from High profit to average profit and that is why price go high with time span.
I can only suggest you to read this article about hyperinflation on Wiki — http: Hi Manshu, Nice post. A couple of queries. What do you think, is the reason for the current inflation? Is it the increased consumption because of the growing populatio, and hence, greater demand and hence, rising prices?
By increasing the Bank FD rates and Home loan rates, i understand that the RBI is concerned about overheating of the economy and is trying to make the citizens reduce their consumption and push their money into the banks.
As this will be mostly affecting the middle and upper classes, a. What will happen to the lower socioeconomic groups who are not bothered abt a house right now? Do they have to wait till the effect of these measures come into effect and the prices cool down? If inflation were to be explained in such supply, demand, consumption terms, is it possible to have a Standard Operating Procedure whenever the situation demands it apart from these rate hikes?
Is increasing production, cutting down on losses, more efficient management practices, clampdown on hoarding other measures to deal with it? If so, have we exhausted these options? My views may be too simplistic…. I am just learning…. Please excuse me for the same if it is silly! It started out with food inflation for sure, and that was the cry from RBI for much of last year and this year as well. Subbarao had himself pointed out that structural issues are causing food inflation, and there is not much monetary policy can do to fight this last year.
However, things started to change this year, and the monetary policy this year referred to a survey called OBICUS which measures the capacity utilization, and that showed that capacity utilization in 17 out of 22 sectors has increased. So while it is a combination of everything, as far as my understanding goes — I think food is where it all started, and is a key to resolve the issue as well.
So, the rate hike is not only targeted towards home buyers, but also towards the industry, largely towards the industry in fact. So, there is a lot of opinion there. About lowering inflation — my views on this are very simplistic viz. How can you progress without fixing this situation? You have statistics where you have malnutrition among Indian children worse than sub saharan countries — why is that?
And this can only be fixed by fixing the rotting food problem, which I think will only be fixed when you have huge companies like Walmart invest in cold storage and distribution. So allow multi brand FDI in India and see what happens. Have they had to redact even one liberalization policy? When nothing went wrong there why this inertia and fear to open it up here?
Hi Manshu, I think apart from the informative write up there is so much more to learn and understand further from the comments. Use this Google search link to go through some of the documents you see listed there. I have learned something today that I had never known before. What is the source data which tells the Govt of India to print more notes? How do they decide the quantum of fresh notes to be printed?
Monetary policy is to realm of RBI who targets inflation rates and uses the current inflation rates,economic conditions and other factors to decide that.
Since most of the countries peg their currency against the dollar, cant the us simply get ricer by printing more dollars, since there will always be a need for it. From the top of my head I can only think of China that maintains the peg, and in order to maintain the peg — they have to buy huge quantities of US bonds which only they can afford.
Officially India stores its Forex in dollars, so the more dollars we have the better, any thoughts? There is no such thing as Rupee falls when the Dollar falls. Usually when someone says rupee has fallen that means it has fallen against the dollar so by definition they move in opposite directions.
I got one more question. Did they actually auction off some treasury to get the money to put onto the balance sheet or they simply add the zeros?
What they do is buy securities through the various primary dealers and what they buy depends on each round. So, as I remember QE2 was mostly govt. This money is newly created money, and they do create the money out of thin air or out of nothing. Is there any agency to keep track of the Dollar created?
I think it is pretty hard to monitor the money supply created. Or we simply trust the statement on the Treasury Balance Sheet. Manshu you say that the money is created out of nothing. But,how does the money reach the common man? There is a lot of scary talks about Greece debts and defaut. If you read them you will think the financial markets and the world will end tomorrow. I have so far not seen any news about the exact implications in Rupee terms if the Greece Govt is unable to meet it,s monetary obligations.
I dont want vauge jargons. I want anaswer in specific Rupees, pl. My question is about black money supposed to be stashed away in swiss banks. I have a same concern and can think it might have to do with agreement between countries. Manshu any thoughts on the question by Venkat. Please appreciate the fact that every time more money is put into circulation — currency loses its value because there is more supply of the same thing.
Printing money is not the solution to anything — it will make matters worse. Can you please give me a source that our currency is not backed by gold? It said that the debt will be perpetual because loan creates money and since everything in circulation is principal, there is no money to pay interest. Refer to this http: Does it mean that demand of usd is 45 times that of inr? If not, what determines its value? However, from what you say it sounds fiction.
We will become Zimbabwe if we were to flood the market with INR. The various currency values are determined by the forex market trade on the various currency pairs. What will stop us? Buddy — the issue with this is you are trying to understand a very complex system with just a movie scene! You will be misinformed if you go that route. All modern economic systems use what is called fractional reserve banking and you should google that up to learn about it.
Yeah, I know Economics is complex. I will devote some time afterwards because currently I am preparing for 12th boards. But economics interests me because I read somewhere that it is made complex so that less people understand what is going on. All the best for your boards and do some solid reading after your exams get over. I would suggest going through Wikipedia and then clicking on the footnotes and reading those papers to get a better understanding of this.
A great way to learn about this and understand this is to read about what happened to the Zimbabwe dollar on this link http: Also, you need to keep an open mind about this and understand that if the answer to our problems were as simple as printing money then it would have occurred to the thousands of brilliant people working on it and they would have done it already. That is the coolest thing about economics. What someone is willing to pay, becomes the value.
This is the article I was talking about. Please tell me if it happens in India. There is no corruption in this and there is no international regulation that any country has to follow. Hello Manshu, prior to the creation of the euro,Italy printed lira to meet some obligations and to reduce the value of the lira making its products more competitive.
I agree that printing money will cause inflation it also devalues the currency which makes it hard for country that import a lot and payments are made in usd,however the italian debt is mostly owned by italians and the rest by europians community ,the printed money goes directly to pay off the national debt through the central bank of italy channel,the only problem i see its the devaluation of the currency,however if the rest of the west prints money there will be no devaluation among these nations,only with nations such as china ,india,brazil etc which is not a bad thing,the now devalued currency makes their products more competitive,.
Hi All, The article produced is elementary and does not explain the reason for linkage between printing currency and inflation. Printing Money that is not backed by total assets of the country has no Value at all.
Even if you print more prices go up. The value of Money Supply in the economy depends upon the relationship between aggregate demand and aggregate supply of the value of goods and services in the country.
This Value is also known as GDP. Inflation will become like a rising serpent will start pinching your pocket. Now if RBI does not print money or stops printing , you will end up excess of goods in the country with nobody to buy and the entire production cycle comes to halt hitting employment, which leads less buying hands and inturns leads to excess goods and son on.
Now becoz of our IT sector, we will be soon having similar imbalance if we not rectify our agricultura, industrial sector where people will try to move from one sector and again have devastating effect on the country.
Hello, Thaks for this article. It clears of some basic concepts.. Government is not trying to communicate any hidden message — they are just trying as best as they can to balance between loss of revenue if they reduce the tax on petrol , and public anger if they let the price come up to the market level.
I dont think tax evasion is the major issue there. The money that goes out of the country and deposited elsewhere is in the form of Dollars since banks do not accept rupee deposits. And it at all the money returns back to India, we will get dollars which will boost our forex reserves. There must be a match between inflation and growth. Excessive inflation is always bad. BUT, it is not only money supply and production of goods and services but also the Velocity which matters ie..
A very informative article …. Can u help me in explaining as to how and y as in y was the need to print money this inflation happened in zimbawe.. And how do the capital markets operate there with prices getting doubled so fast…. When the government spends more than it earns, it needs to borrow that money and that borrowing results in printing more money.
There are no capital markets in Zimbabwe as far as I know not at least in the same form that we think of them here plus a lot of the trades there have started to happen in the USD which of course is much more stable. Does the amount of gold in a country also has a role to play in it..?? In that case the amount of commodites will be the same and with everybody having more money the prices will shoot up.
If Indian Govt prints x INRs and starts buying USDs or swiss francs or gold or anything which is most stable slowly over a period of time slowly as not to increase more supply and not let the forex rate get affected. Value of 50 INRs will still be the same. But, Govt will be able to buy more valuable thing e. USD with the help of less valuabe thing e. You have to have either gold or other commodities for buying USD. But say I can afford gold worth x rupees and suddenly I have x rupees to spend on gold.
Now if I invest the newly printed money on gold over a long period, then I can sell back the gold to buy USD. What is the discrepancy here? That is why all countries in this world keep majority of their Forex reserve in US Dollar.
Now if we analyse the component of the reserve country we may easily come to the conclusion that all the reserve currencies belongs to the developed countries who commands the major share in the international trade turnover. First question comes to our mind is who are interested in our INR to keep it in their reserve or locker?
The answer is only those who have some direct dealing with India in terms of trade or investment who takes a view on our country. Hence to acquire forex reserve India needs to be an attractive investment destination where Foreign Investor put their home currency or US Dollar.
Nobody will come here and sell USD or other strong currency to buy INR and invest here unless they feel that they will get higher return for their investment. Simple yet Crisp and clear article..
That resonates the intellectual ability of you, Manshu… Btw, I am looking for similar clarity for topics such as: How GDP of a country is determined and measured 2. How Currency exchange is determined appreciation and depreciation 3. What is Sensex mean The above are just my curiosity, pl. Please keep up with your good work. On the other hand, when a nation under duress is facing either bankruptcy or usurious rates of interest, printing money may be the only way to go.
Abe Lincoln was faced with such a choice in Abe turned the bankers down and instead authorized Treasury to issue greenbacks. He printed debt-free money. This helped the North win the war. It also gave the nation a uniform currency, which became a very popular standard, replacing all manner of disparate bank notes which had made trade a nightmare.
A similar story can be told with respect to the American Revolution, when Congress authorized the printing of Continentals. Continentals served their purpose of financing the war, but were hyperinflated by the British an an attempt to undermine the revolution.
So, although money-printing does not create wealth, it may serve a valid purpose when a nation is in dire financial straits and in danger of collapse. If the nation survives and prospers, and the printed money is absorbed into the future economy, perhaps it is not so clear cut that the printing thereof did not create some wealth.
Thanks Manshu for a nice explanation….. They simply need to print more greenbacks and float it into the int market. I think thats how they got out of the depression. US did print currency a lot in last 25 years and that is how they have financed their debt , because US dollar is a reserve currency of the world they have misused this status from last 25 years, so US is having a free lunch at the cost of developing countries like India and china, while china already recognized it and are planning to launch yuan as a reserve currency and have been secretely buying gold as alternative to US dollar from last 10 years.
Printing more money does not always create inflation and not makes price up. It depends on how the government distributes or spend the money on the economy. Printing or borrowing more money to create more jobs, infrastructure or cure poverty should be the main objective for all government of any country. Yes may be Zimbabwe printed more money but if they would have spend it rightly to produces more crops, job and basic living things then this country would have shine now.
I lived in rich country like UK doing labor job for many years and earning around 6 to 7 pound an hour look very insufficient to live in this country. So how they say this one of the richest country of the world? Pound currency is so high? Does it mean everybody who live in this country is rich or well enough? If citizen earn or have less money then they do not buy too many things and all the business in the economy suffers loss and share prices can go down.
So, finally if the government print more money to spend it rightly or distribute it properly then it will not create any inflation or price shot up.
But thn wht ppl can make become rich n there ll b no poverty thn our country ll b developed country. N if there ll be money thn inflation b ll der but it ll b not a loss to economy coz everyome ll rich. Hi, Thanks for this! But i have an issue here. Why should it let the market to dictate the terms? If you look at petrol prices, they are fixed by the government and the government subsidizes a large part of that price since the price is less than market price.
This is of course not a free lunch because when the government subsidizes this they incur a deficit since their revenues are less than their expenses and to fund that deficit they have to borrow money which in turn causes inflation.
I agree with you. The amount of money supply increased should be equivalent to the goods and services produced in order to maintain the balance.
For expanding economies like India and China, it is natural that money supply increases. You have clearly brought out how printing excessive money is counter productive, but not when it is excessive or how much should the government print. Please throw light on that. A simple and an informative article. The demand and price relationship Arun.
At a lower price, people demand more of something, and at a higher price people demand less of it. The GDP numbers that are reported are adjusted for inflation so the number that you hear like 5. So,its the consumers and government who drove the price of units in your case.
The suppliers,in order to keep up with the increasing demands started to raise the price because they now require more money to produce more goods. I have a query: What prevents any government in indulging in a scam wherein they print loads of extra currency for themselves?
How can that ever get detected? After all, its the government that controls the currency printing facilities. So whichever government is in power can print a lot of currency notes and stash them for themselves. Why do they need to indulge in other scams, why not just print some extra currency and keep for themselves. It would also be extremely hard to get noticed, etc. This is all electronic and it is not possible to carry it out in the way you are describing it.
I always use to wonder on this topic, thanks for this clear enplanation. But on what basis the currency is printed, what is the calculation behind this? It depends on many factors like inflation, growth, and sentiment in the economy. They need to take everything into account. Bailouts are not simply a matter of printing money and giving it to the company, they are much more complex than that and depend on many factors. But still in any circumstances if the Govt decides to bail out, so will they print new notes to support that or just adjust it from the treasuary.
Take the Air India bailout for example, the government asked the PSU banks to modify contract terms with them and give them necessary financing. Although your article was very good, but i still have some doubts as a result of your explanation.
Consider a case for example — Indian Gov. But this is not true. Can y9ou explain this please? What is the factor that decides the value of a currency with respect to each other?
If you buy dollars then the value of dollars will increase right? Do you understand this? It was very much informative……i think most of the people having their doubt on this topic….. But it seems doubts have been cleared…. Outside our country no one accepts Indian Rupees for exactly the reason that you mention because then everyone will be just busy printing notes and handing it to others. Can you imagine a situation where India accepts payments for its exports in Zimbabwe Dollars.
The same principle applies to INR although to a lesser degree. So I am a person living in India …… what if i want to invest my money some in foreign currency say GBP or so?? You can buy currency futures on the NSE but they will be shorter term and you will have to continue to roll them over after they expire if you wanted to take a longer term position.
Any useful links where i can get some more info about it?? This is a really nice article. I am a commerce student and I am in my final year of C. I had a hard time understanding economics while I was in my junior college. I wish I had an article like yours at my disposal at that time. Then economics would be nothing but a piece of cake for me. Anyway it was a good one. Manshu has on the economics for the benefit of seekers like me….
There is a new article posted 6 days a week on the website and you can subscribe to the articles by clicking on this link: If you can print money at your own will,then there is no fear of any product price increase.
Hi Roy, printing more money will create inflation. It will end up like Zimbabwe. Money is just a piece of paper, confidence, trust and faith is what is all about. The monetary system today depend on their GDP growth and productivity. Perhaps some government may print money secretly without international acknowledgement. Once this secret is unfold, their currency may be damp by everyone. The whole country will be in chaos. As he said when everyone are debitted with such a sum of money everyone will be capable of buying an i-pad.
I believe commodities and fuel are right examples. Bcoz inflation is mainly based on daily essentials. This increases the fuel prices. Similar is the case with food articles such as rice and wheat. This leads to higher inflation. There is only one i-pad and 2 buyers. Who will get the I-pad? The one who is ready to pay more. Now, if both gets more and more money by printing, the price of I-Pad will also keep going up and up.
So, none of them is actually becoming rich by printing more money. And that can happen even if no money extra money is printed. In the similar way, we can find out that any state can print money and not get rich. Yea, you read those sentences right indeed. It is all contingent on how the printed money is used. The utilization of money determines whether a country becomes rich owing to many reasons or becomes poor because of numerous reasons.
So one has to keep control in printing of the currency. Bro U r wrong, there is term known as Fed Reserve Bank. I guess u might know it.
Hi all thanks for your valuable coments on Money. But my doubt is still not clear that how a country decides that how much money is to be printed…. At what interval is to be printed.. I m sure that lot of people asks this question themselves? Pse let us know. USA is pumping in money prompting many experts to warn that it would lead to disaster. When they buy USD from the market which happens every so often when oil companies need to make payments, the price of the USD actually goes up because the demand increases for that.
Hi, I have read the article and also the comments. Can any body please explain me, if any country can print how much currency it wants and if that causes inflation then why cant a country like India with immense poverty print just a little extra money and distribute it to the poor to at least reduce poverty and at the same time keep inflation under control.
I had previously raised a doubt about USA printing money. Let me say it again. USA has been pumping paper money in to its economy at an alarming rate. Many experts view this as a big disaster as it would lead to fuelling inflation.
This doubt has not been answered so far. Can I expect some responses? I believe I have answered this question earlier but maybe that was not satisfactory. Dow Jones hit a new high recently of about The money which went in was supposed to trigger investment in productive assets leading to halt the increasing unemployment.
In actual practise,it has been told, this did not happen and the money injected went into stock market leading to the soaring stock index. My question is How does the money get into the stock market? Then whom to believe.
The reasons given are very credible. I know that Stock Market and country,s economic health need not have a positive correlation but such a negative correlation is surprising. It can be explained only by huge paper money going into the market. Do you have any other reason except telling dont believe what you read. Also do you know that the Dow is a price weighted index? The only big index today that is price weighted, why pay any attention to it at all? I deeply apologise if I have hurt you.
I have many times told you how I appreciate the trouble taken by you in educating persons in their efforts to solve the doubts they have regarding personal finance and general practical economics.. I do not know what has motivated you to undertake this job which must be eating into your valuable time. And unlike so many experts you dont expect any remunaration in return. Regarding DOW, my interest is only general. I read some articles about finance which is theoritical and if I dont understand the practical side I run to you for solution.
I still dont understand this. USA is pouring paper money into the monetary system expecting the system to use it in creating jobs. This is not happening as unemployment situation continues to be grim.
Some of this money has apparently ended up in stock market. I just wonder how? Are the banks borrowing cheap money from Govt and lending it to speculators of stock? Is this permissable under law? Against what security do the Bankers lend? Will this cause a bubble like real estate lending did 3 years back? These are some of the questions I have?
The euro is the second largest reserve currency a status it inherited from the German mark as well as the second most traded currency in the world after the U. Please tell me if it happens in India.
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