Now that we are familiar with some concepts of money printing, lets take some ancillary concepts in consideration.
How much money is in circulation?
Drawing conclusions from the last article, it’s now safe to assume that we cannot print unlimited money as there is an overall limit on the amount of money that can be printed and circulated in the monetary system.The question likely to arise now is how much money is in circulation in India. For this a reference to RBI report is inevitable.
Money in circulation means money that is in physical existence in the form of notes and coins.
Money in Circulation
April 30 2010
April 30 2011
Nearly 640000000000 notes of all denominations combined are in circulation in India as per RBI estimates.
There will be a considerable growth in the amount of money in circulation due to following reasons.
I) India is a rapidly growing economy
As India is growing rapidly there is a tremendous increase in intra state trade and general economic activity is on a rise. Due to this increased domestic demand there is an increasing demand for Goods and services and obviously all that is needed for all this is Cash. Therefore for the upcoming future , India will See an increase in cash being printed and circulated in the economy
II) Banking System in India is not widely distributed
India is an underbanked country and rural penetration of banking services is low. Additionally rural transactions are of such a nature that utilizing banking services for the same will not be suitable considering the overall situation.
III) India is a developing economy and plastic money is still not used predominantly.
In developed countries, there is a predominant use of credit cards and virtual currency for transactions as opposed to cash. Countries like Sweden, Korea are at such a point that they are willing to turn into cashless economies. Although turning totally cashless is nearly impossible in India considering its very vast terrain and a diversified economy, we can expect that Cash shall always remain predominant in India.
Inflation:- A double edged sword
Printing more money causes Inflation. So you might think that an inflationless economy should be and will be a primary target of every central banker around the world. Then you are wrong…. Wrong….Inflation is a double edged sword …… No matter how you efficiently you deal with it , it is bound to hurt you one way or the other.
When the increase in inflation exceeds the interest rate on bank deposits it is said that we are getting a negative return on our investment. Rise in inflation eats away whatever income we generate through interest or on safe or riskless investments. Since most Investors prefer Bank deposits and Bonds as safest mode of Investments , at least in India , we can assume that Inflation affects the Majority.
So Inflation is a BIG BIG NO……Really is inflation really that Bad?
The answer is NO …..
If the economy does not exhibit inflation, it goes into an extended period of stagflation.
Stagflation is combination of two words stagnation and inflation. If prices remain fixed over a longer period of time, the economic cycle and activity dulls. When there is an increase in prices, profitability of producer increases and that surplus profit might get reinvested in the productive capacity of the industry and country as well ….therefore over a period of time with stable inflation growth there is a rapid shift in the economic activity and economy grows.
Real world concerns of no Inflation.
While the Indian government and central bankers are giving a tough fight to inflation in the eastern hemisphere, there is another wind blowing in the western hemisphere. Central bankers from Europe (European central bank ) to United states (Federal reserve) are fearing that their economies might fall into trap of deflation as Inflation there is not rising too fast.
Have they gone Mad?
No certainly not.
The fear among them is that their countries might too fall into what japan witnessed during the nineties where there was virtually no growth in the real economy, prices and interest rates remained the same and interest rates were at a rock bottom. Shinzo abe, the current Japanese prime minister / president has vowed to fight this lest their economy face the same consequence.
So inflation is indeed a double edged sword.
Noted Harvard economist has recently suggested that India is witnessing a deflation after undergoing red hot growth in the earlier decade. Rising Inflation , increasing unemployment and lesser investments are signs of this deflationary situation and rbi is now countering this aptly.
Will their be a time when there will be no money? Will it be possible?
Dear reader, do you read books beyond those 1000 pager ca/cwa/cs modules. You should read.
Being a science, science fiction and fan, I keep reading astrophysics journals and popular science books and novels. An interesting and deeply intriguing book that I happened to read is Michio kaku’s ‘Physics of the future’ which predicts what will happen in real future. For this not acquainted, Michio kaku is one of the greatest scientists living as of now.
What’s the need to link physics, economics and finance ?
There is a need.
Question: Why do we need money? Why do we spent it ?
Answer: To buy products
Question: How are products, goods and services made
Answer: By manufacturing, transformation, processing etc etc.
Question: What is required for production, manufacturing or transforming products, goods and services ?
Answer: Energy of course……
Hmmm…So energy and power is what is required to produce goods, be they of whatsoever kind.
Now going back to our reference of Michio kaku, he envisages a world where in a foreseeable future man will utilize dark matter and energy and utilize universe’s power to fulfill his requirements. This means that there will be an unlimited amount of energy readily available which means that there will be virtually no limit on what could be achieved. Since manufacturing merely involves transforming matter to energy (remember your pre commerce days in school …..10th science? :P ) , there will be unlimited production of goods such that we could really make whatever we want…..
Since we can make whatever we want due to this never exhausting source of energy, money’s requirement will be less and less.
Don’t rejoice though because this will not happen at least until 2500 a.d , or 3000 a.d.
Lets conclude this here.
(Its really odd to see that there is no advanced economics subject as a study in CA/CS/ICWA intermediate or final study modules or syllabus despite it being such a fundamental subject. Its taught in cpt / foundation but is limited in scope. Advanced economics is a much much deeper concept.)
By rohit jain
Some facts and figures are taken from Rbi reports.