Why can’t a country print money and get rich?

by Manshu on January 30, 2011

in Economy

This is another post from the Suggest a Topic page, and while the original comment had a lot of questions about the overall functioning of an economy, I thought I’d take one question from it, and try and answer that in a post.

Why can’t a country print money and become rich?

A lot of people have this misconception that a country’s currency is backed by the gold it holds. But, this is simply not true – any country can print as much money as they want, and they don’t need to have any gold to back their currency.

In fact, in recessionary times – countries do resort to printing money, or what is known as Quantitative Easing, – a term that became popular just after the recession.

But, that measure is only for extreme situations, and is also considered dangerous because printing money causes inflation in an economy, and if you print too much money you can get hyper – inflation also.

So, how does printing money cause inflation?

Demand and Price

Let’s take a simplified example to understand this. First, think of how demand of a product is related to its price.

That’s fairly easy to do right? A lot more iPads will sell at Rs. 5,000 than they will at 25,000.

If you were to draw a graph that shows the relationship between demand and price of a product it would generally look like this.

Demand Curve
Demand Curve

In this example – at 1 rupee you demand 100 units of a commodity, but at Rs. 2 you demand just 30.

You can get fancy and call this a downward sloping demand curve.

Supply and Price

On the other hand a lot more suppliers will be willing to get into a business if the end product sells at a higher rate. I remember quite a few years ago, a lot of households started planting vanilla in Kerala because vanilla rates had shot up.

So, supply will be high at higher prices, and that curve would look something like this.

Supply Curve
Supply Curve

In this example – you want to supply just 50 units at Rs. 1.20, but when the price shoots up to Rs. 2.15 – you are willing to supply as much as 120 units.

Feel free to tell your friends that supply curves are upwards sloping.

How is the price finally fixed?

The price of any product is largely determined by its demand and supply, and when you super impose the price curve and demand curve – the intersection is called the equilibrium price, and it is generally believed that prices will move towards this point and stabilize here.

In our example this will look something like this.

Demand and Supply
Demand and Supply

What will happen if the government prints money and hands it out to its citizens?

What happens when your income rises? – Your consumption or demand of certain things also rises with your income.

I see a great example of this with cell phone usage, as I have cousins of varying ages. The one who goes to school just uses SMS and gives missed calls, the one in college doesn’t mind calling you, but you have to call her back if you want to have a long conversation, and Mr. Mittal can dedicate at least one cell phone tower to the one who has started earning.

The eldest one has gone through the stage of SMS and short calls, and as her income rose, so did her consumption. Your consumption / demand will generally increase with your income levels.

Now think of a situation where you open up OneMint and read that the government is sorry for all its misdeeds, corruption, and general incompetence, and has decided to credit everyone’s savings account with Rs. 1 crores, and if you don’t have a savings account then a minister will come to your house and give you the cash personally.

After you recover from the mild heart attack this news causes you – you will think that you have become rich, and will start spending like crazy. If you used an air conditioner for just the night – you will now want to use it all the time.

Your demand for a lot of things will increase since you have this extra money now, and you are rich.

So, let’s get back to our earlier example, and say that instead of demanding 30 units at Re. 1 – you will now demand 50 units at Re. 1 and instead of demanding only 1oo unit at Rs. 2 – you will now demand 120 units at Rs. 2.

This will have the impact of shifting the demand curve to the right, and pushing the price of the commodity upwards.

If you were to graph this – it would look something like this.

New Demand and Supply
New Demand and Supply

The green star indicates the price which will be fixed due to the new realities of increased notional wealth, and people demanding more because their wealth has been increased.

Think of times when the stock market is booming – people have this “wealth effect” where they feel that they are richer and start spending more, and as a result prices rise as well. Just printing money will also do the same thing.

What I have done here is take an example that’s used with respect to increased incomes, but in this case the increased income is nothing but a handout from the government which has printed more cash. This is a theoretical way to understand the consequence of printing money, and you can see a real example of this with Zimbabwe.

At one point you could a buy a 100 billion dollar Zimbabwe bank note for 15 US Dollars at E-bay, but even that was really expensive because if you were actually in Zimbabwe you could buy just 3 eggs with it!

So, printing money is not the way to become rich – becoming competitive – producing cheaper goods, and facilitating exports are.

If your people can buy onions at 5 bucks a kg instead of 50, they are richer by the amount they save and this can be used elsewhere, but if you credit everyone’s account with more money – they will just end up driving the price of onions higher, and that won’t do them any good.

As always, feel free to weigh in on the question, and be sure to point out any mistakes that you see.

All numbers taken from here.

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{ 295 comments… read them below or add one }

Loney January 30, 2011 at 7:51 PM

Dear Manshu
That was an excellent article. When we speak of Zimbabwe, it was an epitome of Hyper-inflation. What would you say when a country prints 10billion dollar notes which cannot buy you anything. It fears me to think of a situation where prices of all commodities double in a matter of hours. To illustrate, Think that costs double in two hours…
Assume that an egg costs one dollar now.
Time….Cost
0(Now)..1
2…………2
4………..4
6………..8
8………..16
10………32
12………64
14………128
16………256
18……..512
20………1024
22………2048
24……..4096

You buy an egg for one dollar today. You wake up the next morning to find that the price has reached 4096 dollars. On the second day, the price of the same egg would be 16,777,216 dollars. This is what would happen if a country mismanages its finance.

The following is a good wikipedia link on the hyperinflation in Zimbabwe
http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe

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Manshu January 30, 2011 at 11:21 PM

Thanks Loney – you know it means a lot to me coming from you. I read that in those times in Zimbabwe traders didn’t accept checks unless you write them for a much higher amount than the price because by the time the check clears the prices would have risen quite a lot!

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Loney January 31, 2011 at 7:11 AM

Hi
My earlier comment at another post would be more relevant here.

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Loney January 31, 2011 at 7:11 AM
Swaroop Rao January 30, 2011 at 8:05 PM

Excellent article! However, there was one thing that I found to be a bit counter-intuitive. Here’s the two paragraphs I am referring to from your article.

“Your demand for a lot of things will increase since you have this extra money now, and you are rich.

So, let’s get back to our earlier example, and say that instead of demanding 30 units at Re. 1 – you will now demand 50 units at Re. 1 and instead of demanding only 1oo unit at Rs. 2 – you will now demand 120 units at Rs. 2.”

I would have phrased the second paragraph as follows:
“So, let’s get back to our earlier example, and say that instead of demanding 30 units at Re. 1 – you will now demand 30 units at Re. 1.25 and instead of demanding 1oo units at Rs. 2 – you will now demand 100 units at Rs. 2.25”

The point I am trying to make is, when people feel prosperous, they are willing to pay more for the same quantity than they would have earlier. This has the effect of shifting the demand curve to the north-east (up and right). That, in my mind, is why

I hope I am not confusing your readers further!

Regards,
Swaroop

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Manshu January 30, 2011 at 11:20 PM

Hi Swaroop – In this context I wanted to highlight that even though the price of something remains the same, you will demand more of it when your income rises because relatively speaking that has become cheaper for you as your income rises.

Should have given a better example than the cellphone usage I guess :)

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Gulshan Madhur February 16, 2011 at 4:04 AM

I agree with Swaroop. You need to change the figures to make it sound like at Rs.1 instead of demanding 100 units you will demand 150 units or any number greater than earlier number. Similarly at Rs.2 instead of demanding 30 units you will demand 50 units. However, in any case the demand at Rs.1 can not be lower than demand at Rs.2.

I got your point Mashu but you need to be a bit careful while puting in numbers and there is nothing wrong with your cell phone example. In fact, I love the kind of real and creative example you have put in here.

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Gulshan Madhur February 16, 2011 at 4:12 AM

And yes Swaroop also made the same mistake of putting in a higher demand at Rs.2 than at Rs.1.

Demand at Rs.1 can never be lower than demand at Rs.2.

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Manshu February 16, 2011 at 5:04 PM

That’s not always right Gulshan – there is this concept of Giffen goods which are consumed more at higher prices, so you may want to read up on that.

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Gulshan Madhur February 17, 2011 at 11:24 PM

Mashu,
I agree that Giffen or Inferior goods are consumed more at higher price as the income effects dominates the substitution effect. But here in you example I think its not apt to give example related to Giffen goods because in your first situation you have given example about normal good. So second case should also be that of normal good only.

I would like you to help me with this concept:
Situation 1 of you case:

At Rs 1= I demand 100 units,
At Rs2=I demand 30 units.

Situation 2 of you case:

At Rs1=demand 50 units instead of 30(earlier you had assumed 100 units at Rs.1)

At Rs 2=demand 120 instead of 100(earlier you had assumed 30 units at Rs2).

I am confused that it should be for a normal good:
Situation 1:
Rs1=100 units
Rs2=30 units( here demand at Rs2 is lower than demand at Rs1, which is correct for normal goods)

Situation 2 should be:
Rs1=120 units
Rs2=50 units.

What you have said for situation 2 is:
Rs1=50 units
Rs2=120 units(demand at Rs2 is higher than demand at Rs1, which should not be the case for normal goods)

So for normal goods demand at a lower price should always be higher than demand at a higher price. It is same as saying demand at Rs1 can never be lower than demand at Rs2.(demand at lower price can not be lower than demand at a higher price for normal goods).

Kindly help me clear my confusion.

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Manshu February 18, 2011 at 9:24 AM

I mentioned Giffen goods because I saw the word “never” used in your comment, and I thought I’d let you know about this. They have nothing to do with my post as you mention.

So, getting back to this point there are two things – movement along the demand curve, which is what you are describing, and shifting of the demand (or supply curve) which is what I’m describing.

When the demand curve shifts rightwards that is an indication that demand has risen due to factors other than price. These can be factors like income level for example. A great example of that is how you keep hearing noises about the increased demand for “protein rich foods” with the increase in income levels in India, and the consequent contribution to inflation etc.

In this case the price of pulses or milk didn’t fall but the demand increased due to external factors like rising incomes, and demand curve shifts.

I’d recommend reading more on causes of shifting demand and supply curves, and I’d imagine there is a lot of info on the interwebs on this topic.

Hope this helps :)

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gulshan February 19, 2011 at 11:49 AM

Thanks Manshu..and I really appreciate your prompt reply..I have got tonnes of knowledge about many complicated issues on this site.

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Manshu February 20, 2011 at 5:13 PM

great to hear that Gulshan, and it is a pleasure for me to interact with smart people such as yourself who engage in smart conversations.

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Manshu February 16, 2011 at 5:12 PM

Swaroop was saying something different.

I am actually doing what you have described I should do which is saying that instead of demanding 30 units at Re. 1 – you will now demand 50 units at Re. 1 and instead of demanding only 1oo unit at Rs. 2 – you will now demand 120 units at Rs. 2. But then in the next line you go and say that demand can’t be lower which is contradictory to what you have proposed earlier.

As for your saying demand can’t be lower at a lower price apart from what I said about Giffen goods, you should also read about shifting of the demand curve rightwards which will better help understand this concept and develop a more holistic view of the subject. I’ll see if I can get some links for you.

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sai January 4, 2012 at 5:21 PM

you are correct.

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Ankit January 30, 2011 at 8:20 PM

Nice article.
I always thought it was gold.

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Manshu January 30, 2011 at 11:18 PM

Thanks Ankit – that’s common. A lot of people think that, and I get 1 email from a friend every month who discovers this and baffled by this :)

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Ams January 30, 2011 at 10:39 PM

Dear Manshu,
Excellent Article. Thanks a ton for posting this. Believe me I have been baffled by this question for over 4 months now and this makes my thinking clearer.

Just a couple of questions:
1) If it is not Gold that drives the printing of money then, how does the country control the printing of money and decide when it needs to print and when not?
2) Why is there difference in the currency rates between the two countries like roughly Rs. 45 equals 1 dollar. Then will printing more money make this difference reduce and allow us to import goods at lower rate?

Thanks a lot for the post again.

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Manshu January 30, 2011 at 11:17 PM

Thank you AMS.

1. The general economic conditions determine if the country wants to tighten their purse strings or loosen them. For example, India is seeing hikes in interest rates which is due to the fact that inflation is high, and the RBI is trying to control inflation by increasing interest rates and discourage consumption. On the other hand countries like Japan and US are pursuing close to 0% interest rate policy in a bid to encourage borrowing and spending to stimulate the economy.

2. The difference is again due to demand and supply with respect to various countries and their underlying economy. So, a country like Zimbabwe saw it’s currency crash with it’s economy because no one outside (and perhaps inside as well) wanted any Zimbabwe dollars at all. The only exception is US which saw its currency strengthen even though its economy was weakening during the great recession, as everyone else was facing a crunch also and the USD became the ultimate safe haven for investors to stash their money in.

Hope this helps, thanks for your comment.

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Ams January 31, 2011 at 4:10 AM

Yes, this definately helps Manshu.
Thanks a lot

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Manshu February 1, 2011 at 8:51 AM

Glad to hear that!

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praveen h December 6, 2011 at 5:58 PM

Dear Manshu
your explanation was brilliant, by setting very good simple examples which everyone

with a little knowledge of economics can understand better, hope you do same thing

in future, All the best.

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Manshu December 6, 2011 at 7:48 PM

That’s awesome to hear – I appreciate that – thank you!

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Retvic January 30, 2011 at 10:40 PM

In this article you said gold is not the base for currency printing, I think it would be more value addition if you had elaborated on what is the basis of currency printing.

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Manshu January 30, 2011 at 11:11 PM

Thanks for your feedback Retvic, I’ll keep that in mind, and build on this article in the future.

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Retvic January 31, 2011 at 6:01 AM

Thanks Manshu, I am sharing here a link which describes little more in detail about the historical realtionship between Gold and prinitng of currency and the impact of delinking gold and currency after 1971.

http://www.zealllc.com/2003/infdef2.htm

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Manshu February 1, 2011 at 8:50 AM

Thanks for the link!

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Indian Thoughts January 30, 2011 at 10:58 PM

Nice article. As a child whenever I used to run out of pocket money and dad would refuse to give more, I used to wonder why govt doesn’t print more money so that ppl never run out of it. :)
So I’ll fwd this article to all youger generation of my family so that they understand this concept well in time :)

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Manshu January 30, 2011 at 11:11 PM

:) That’s funny now, and welcome back – haven’t seen you around for a while….is your monthly target post up already?

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Indian Thoughts January 31, 2011 at 2:07 AM

Not Yet but I’ll be doing a post soon to update abt me… life has been very hectic recently…
And guess what I am so amazed to know that so many ppl still think that gold forms the basis of printing money… or probably i am well read on this topic for a change :)

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Manshu February 1, 2011 at 8:53 AM

Will look forward to it – will show in my reader, though I’m unable to check it as regularly these days.

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Arun January 30, 2011 at 10:58 PM

Good article.
A doubt though. If there is high demand for a product, woudn’t there be competetion between the suppliers which would bring down the price?
Regards
Arun

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Manshu January 30, 2011 at 11:10 PM

That’s true Arun, though usually there is a significant gap between increase in demand and increase in supply in case of goods that need some sort of a physical manufacturing capability. So, if Tata were to see great demand for Nano, they might increase the supply, but that will take long, and in the meantime you will see a price increase.

In this example though since everyone has got extra cash, demand for everything will increase, so there will be no motivation for a supplier to switch as each supplier sees an increase in demand in their own goods.

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Kiran January 31, 2011 at 1:18 AM

I think it also helps to know that it was not always like this, where a govt. could print as much money as they like.

In the yesteryears (around 40 years back), money was indeed tied to the amount of gold any country had. However, Richard Nixon (and the United States) unilaterally decided to get away from the gold standard in 1971 (its an offshoot of Bretton Woods agreement – http://en.wikipedia.org/wiki/Bretton_Woods_system). All other countries followed the US, and tied their currency levels to the US Dollar (fixed or floating currency level is a topic for another discussion).

Why did the US do it? Well, its an extremely interesting story. But in short, they wanted to control the world economy by billing Oil in Dollars and as a consequence forced other nations to follow suit (the US accounts for a large part of demand for Oil) (and in turn countries had to automatically peg their currency level to the dollar)

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Arun January 31, 2011 at 2:40 AM

Thats interesting! I had assumed minting was tied to gold until I read this article. Even we were taught like this in our economics class. So is it the value of US dollar which we base our minting on?

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Smart Singh February 1, 2011 at 1:28 AM

Slight disagreement here Kiran. I agree that the original intention for Bretton Woods was to make dollar the world currency and bring stability to other currencies which could be pegged to the dollar. Dollar was convertible to gold and every other currency was convertible to dollar at a fixed rate.

The reason for closing the gold window was simply that U.S. was losing its credibility because it was unable to check its deficit and spending. Countries started demanding gold for their dollars and they simply did not have enough gold for that. So they simply broke their promise to convert dollars to gold.

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Kiran February 1, 2011 at 7:12 AM

@SmartSingh – I think we are on similar lines. The US couldn’t keep up with deficit and spending because of the spending on Oil. I read a book sometime back ‘The Life of Saddam Hussein’ published by the TIME magazine after Operation Desert Fox (1991 Gulf war). It was a brilliant book, not only giving insights into why US attacked Iraq after Iraq attacked Kuwait (short answer: they feared Saddam would go on and annex Saudi too, which was US’s main supplier of Oil) but also gave explanations on why Oil is the real currency in the world and every currency in the world, especially the dollar is dependent on Oil levels [I highly recommend that book – The rise of Oil giants like BP, Chevron etc, Saddam as a CIA asset, Moving away from the Gold standard, Saddam’s Iran war, Fears of Middle East and hence fear of US for its Oil and why US has a standing army in Saudi – everything explained lucidly. Brilliant read]. Therefore, US deficit = More spending on Oil = to get away from any limit on spending on Oil = Move away from the gold standard.

I think Manshu will say ‘Boss, this is not a political conspiracy/political history website. This is a financial website and I’d appreciate if you guys stick to the topic at hand’ :) Sorry Manshu…just couldn’t help explaining the intrigue of Oil, Dollar and the reason for movement away from the Gold standard :)

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Manshu February 1, 2011 at 8:20 AM

As long as the discussion is civil – I don’t mind. I won’t engage in these though :)

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Smart Singh February 2, 2011 at 12:34 AM

Yeah, that’s why I said slight disagreement. I was just correcting the chronological and factual details.

I would not engage in the ‘intentions’ debate as well. :)

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khalid January 31, 2011 at 2:47 AM

Very nice article, this was question which confused me all the time, but its very much clear. Till today I used to think that currency of any country is depend upon the gold base of that country.
Thanks for posting such a wonderful article.

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Manshu February 1, 2011 at 8:52 AM

Thank you for your kind words Khalid.

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kabir January 31, 2011 at 8:57 AM

There’s another aspect to voluntarily printing money that the US has been exploiting to its advantage.
Let’s say there are 100 US dollars in circulation and the US Dollar : Yuan conversion rate is 7 Yuan = 1 USD. Now say that the chinese hold 50 USD (half of the entire circulation amount) as their trade surplus. US asks the chinese to revalue the Yuan upwards, which they dont. So, the US unilaterally prints another 100 USD and releases it into circulation. Now, since the chinese have fixed their rate of conversion, USA still owes them 50 USD, but these are now worth only one fourth of the new amount in circulation. Defacto, the Yuan has been revalued upwards while the USD has been devalued…and against the wishes of the chinese! The only way in which they can get out is by dumping the USD….but that would cause it to fall in value in any case…….

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Smart Singh February 1, 2011 at 2:06 AM

Nice article Manshu. However, reading your article made me ponder about what happens if govt really gifts everyone Rs. 100 crores. Pure hypothetical exercise for brain.

Now that’s a kind of socialist action, where wealth is being distributed. 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. Just makes me wonder.

So in fact, this action would lead to loss of productivity due to hyper-inflation and forced, unproductive socialism.

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Manshu February 1, 2011 at 8:44 AM

Is it really “wealth” though? it’s just paper money.

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Smart Singh February 2, 2011 at 12:35 AM

Sorry, I meant ‘redistribution’ of wealth, not the distribution of paper money.

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chsbp February 6, 2011 at 6:19 AM

Hi Manshu. .

I have a doubt regarding what you have put forward. .

You said the following in quote:

‘So, let’s get back to our earlier example, and say that instead of demanding 30 units at Re. 1 – you will now demand 50 units at Re. 1 and instead of demanding only 1oo unit at Rs. 2 – you will now demand 120 units at Rs. 2.

This will have the impact of shifting the demand curve to the right, and pushing the price of the commodity upwards.’
——————————————————————————————————-

My query is:
When actually your PurchasingPowerParity (PPP) increases, your spending power increases. So, for the product which you paid Re. 1 for 30 quantities, you will pay more for the same 30 quantities.

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. 1.5 for the same 30 units).

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.

Please correct me if I am wrong!!

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Manshu February 6, 2011 at 6:42 PM

PPP is the concept of exchange rates of two countries at which the purchasing power becomes the same in both the countries, so that’s not really applicable in what we are saying here.

In this scenario, it’s not the question of a single company, because everyone has more money for everything now. It’s not a case where Apple makes a hit product and there is a high demand for that.

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kalyan211 February 7, 2011 at 10:43 AM

great feedingg…………..

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Gomathi Shankar February 15, 2011 at 7:16 AM

Thanks for the lucid explanation Manshu.If a country’s currency is not backed by the gold it holds,then what decides the amount of currency a country can print?

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Manshu February 15, 2011 at 4:29 PM

It’s based on several factors particularly the economic conditions of the time. In times of credit crunch and low economic activity – governments reduce interest rates to promote lending, and will “print” money through things like Quantitative Easing to boost spending and aggregate demand.

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Marco P February 15, 2011 at 10:12 AM

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?

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Manshu February 15, 2011 at 4:27 PM

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. As during the last credit crunch American banks didn’t lend out the money since their own balance sheets were in trouble, and they were worried about further bad debts.

Here is a post about QE that you may find useful Marco.

http://www.onemint.com/2008/11/26/what-is-quantitative-easing/

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saran May 8, 2011 at 3:54 AM

my question is
if a government can print more money,then why a government talks about debt?
print more money and clear all the debt.
one more question .,,
what is the need of forex? please explain briefly

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Manshu May 8, 2011 at 9:09 PM

The government can’t print money on its will that’s the reason they need to reduce debt by other means.

Forex is required to carry out trade with countries who won’t accept INR for payments like Saudi Arabia won’t accept INR for the oil they export to India.

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Sonia June 14, 2011 at 4:56 PM

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. Keep prices fixed and allow 20% as a profit to be added to the final price of the product. There will be no inflation for a long time to come. all people will be rich and happy.

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Zarrar Shaukat August 15, 2011 at 2:42 PM

i find this ariticle very informative ….Manshu solved my misconception….thanks a ton for that enhance!!!!

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Zarrar Shaukat August 15, 2011 at 2:44 PM

i find this ariticle very informative ….Manshu you solved my misconception….thanks a ton for that enhance!!!!

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thasleem August 24, 2011 at 5:29 PM

Thanks a lot for the informative post. Can u elaborate on the query asked by saran…if a govt prints more money.. the money will go into the hands of its people…fuel demand and hence give rise to inflation. But a country can very well use the printed money to repay debts/loans taken from other countries. In this way, there will be no inflation worries also…please explain

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Manshu August 25, 2011 at 1:13 AM

External debt is usually held in a foreign currency and a very good example to understand that right now is Greece. Greece is struggling because it owes most of its debt in Euros and it doesn’t have an authority to print Euros. That’s usually why countries end up defaulting in external debt since they can’t print the currency that the debt is denominated in.

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thasleem August 25, 2011 at 12:10 PM

and thats why uk is in a much better position…coz it has its debt in its local currency..??thx for the info..this question has been puzzling me for several yrs. thx a lot:) lookin fwd for more informative posts..

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Manshu August 25, 2011 at 10:04 PM

yeah, so recently you must have read about the US debt ceiling debate and also how ridiculous that was because the US owes its debt to people in USD, and they can print USD, so technically they can never default on their debt.

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Master September 4, 2011 at 12:03 PM

If I am understanding it right then you want to say :

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. Inflation, Inflation Inflation !!!!

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. Why don’t they think in this way? I am not a management student nor a commerce student but If I can conclude a solution for inflation why others can not?

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Manshu September 5, 2011 at 6:12 AM

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?

If the solution were this simple, it would have been implemented by now, and how I wish it were this simple :-)

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Master September 5, 2011 at 8:11 AM

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.

Second thing which I guess is why they do not implemented such solutions is just because they want more and more profit and don’t want to go back. Lets take an example:

Step 1: When demand turned high, they increased the price due to less supply, and they gained more profit.

Step 2: In few days or weeks, to gain more profit in short-term duration(High price time), they increased the production by say 50%. Now the production is 150% or it can go above also. They are still selling on high price to get more profit. But Ideally they should decrease the price as production is also high now but this never happens and due to this other related products also increases their rates because “This output can be an input for other things”. 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. Every one likes to be on Forbes list :)
and this is where govt should put rules & restrictions but I think they are getting commissions or some profit percentage.

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Manshu September 5, 2011 at 8:56 AM

I can only suggest you to read this article about hyperinflation on Wiki – http://en.wikipedia.org/wiki/Hyperinflation#Hyperinflation_and_the_currency

There is not much more I can contribute to this discussion. Thanks!

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Vijay September 4, 2011 at 6:49 PM

Hi Manshu, Nice post. have been trying to figure out the same like many other readers. A couple of queries.
1.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? or is it the amount pumped into the economy by the present Govt thru’ NREGA scheme and other measures? or is there some other reason to it as well? or is it a combo of several factors (as is usually the case)?
2.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?
b.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)?
c.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!

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Manshu September 5, 2011 at 5:57 AM

Great questions Vijay – and let me try to put forth my perspective on them.

1. 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. In fact Dr. 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. Well, not that it can’t do anything, but the main culprit was food inflation, and that’s due to structural issues. 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, you have a situation of growing aggregate demand and to slow that they use policy measures which is to increase the interest rates – that’s when they increased the REPO rate from 7.5% to 8.00%. This year they also referred to something called “generalized inflation” and said that the food inflation is now showing up in other places as well.

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.

2. RBI increases its REPO rate – that’s the rate at which banks can borrow from RBI, and in turn that increases all the rates – now this affects housing loans, personal loans and all that, but it also affects rates at which companies can borrow which then slows down investment and reins in aggregate demand. So, the rate hike is not only targeted towards home buyers, but also towards the industry, largely towards the industry in fact.

About standard operating procedures :-) yesterday someone tweeted out that based on where you went to school you can have totally different views of economics :-) what he meant was that there isn’t consensus on treating the economy in the right way. There is extremely bitter debate and you can’t really think of economics in the same vein as you think of Maths or Physics. So, there is a lot of opinion there.

About lowering inflation – my views on this are very simplistic viz. you have this situation where food rots and people go hungry, and that’s because your storage infrastructure is nil, and the PDS is broken. How can you progress without fixing this situation? It’s not just food inflation, I mean its not just a number, this is a serious thing that affects people at every level. You have statistics where you have malnutrition among Indian children worse than sub saharan countries – why is that? Because they can’t afford food of course!!! 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. I don’t think anyone can say confidently that there will be no negative effects, but look at the other sectors that have been opened up? Have they had to redact even one liberalization policy? When nothing went wrong there why this inertia and fear to open it up here?

That’s the way to go in my opinion, and the lesser the government does the better it is – let the private sector handle it.

Sorry about the longish comment, got a bit carried away…..

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Raghu September 9, 2011 at 1:53 PM

Hi Manshu,
I think apart from the informative write up there is so much more to learn and understand further from the comments. Thanks.
I found the interview by India Together’s Subramaniam Vincent with Dr. Narendra Jadhav @ http://www.indiatogether.org/2005/dec/ivw-jadhav.htm very informative on the currency, inflation and other aspects.
Dr. Narendra Jadhav is presently serving as Member, Planning Commission, Government of India in the rank and status of Minister of State.

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Manshu September 11, 2011 at 5:09 AM

Very nice article Raghu – thank you for sharing.

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Mohan September 16, 2011 at 12:07 AM

thanks for the nice article…still some questions remain in my mind.even thiough you have said many factors decide the amount of currency a nation can print you have not mentioned them.could you at least suggest some links where i can get more information.

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Manshu September 18, 2011 at 10:52 PM

There are several great articles that explain this, but I don’t know of a single one that covers everything comprehensively. Use this Google search link to go through some of the documents you see listed there.

http://bit.ly/oYP9tW

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Jay October 14, 2011 at 9:23 AM

Good Article! amazing stuff you have written here! I have learned something today that I had never known before. Now I can actually sit in a gathering and discuss this topic because I know something :) thanks

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Manshu October 14, 2011 at 8:16 PM

That’s a wonderful comment and great to know that – thank you!

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ramamurthy October 17, 2011 at 11:08 AM

What is the source data which tells the Govt of India to print more notes?Who decides,Finance Minister or RBI? How do they decide the quantum of fresh notes to be printed?

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Manshu October 18, 2011 at 11:04 PM

RBI does this, and at least theoretically the government shouldn’t have any say on this. 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.

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Arun Satish October 19, 2011 at 12:13 PM

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. Especially since the import/ export of most countries are in dollars.

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Manshu October 19, 2011 at 7:00 PM

That is not true – Arun – most countries don’t peg their currency to the USD. 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.

To the next point, they can’t simply print more dollars because that will flood the market and people will then move on to other assets like Swiss Francs, Japanese Yen, Euro? and even gold.

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Arun Satish October 19, 2011 at 7:12 PM

I think India pegs its Rupee to the Dollar, thats why the Rupee falls when the dollar falls.

Also India’s international debt and export income comes in dollars, not in Rupees.
Officially India stores its Forex in dollars, so the more dollars we have the better, any thoughts?

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Manshu October 19, 2011 at 9:00 PM

Rupee peg to Dollar means a constant USDINR exchange rate, which is not the case for India. The exchange rate can vary as much as 20 – 25% in a year. 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.

India primarily holds USD as its reserves but that’s not the only currency, it holds other assets also like JPY, EUR, Gold etc.

But in general yeah, the more dollars you have the better it is.

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SANGITA October 23, 2011 at 10:25 AM

tks mansur

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Winston October 27, 2011 at 6:56 AM

Japan been trying to devalue Yen to become competitive, isn’t printing Money a easy solution?

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Manshu October 28, 2011 at 4:19 AM

only if there is demand for your currency, else you will face the fate of Zimbabwe.

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Winston October 28, 2011 at 8:59 AM

Thanks Manshu for your prompt reply.

I got one more question. When Federal Reserve start printing $ using the program QE, I know they actually add some zeros on their balance sheet and expanded it. Shouldn’t the money come from somewhere.

Did they actually auction off some treasury to get the money to put onto the balance sheet or they simply add the zeros?

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Manshu October 29, 2011 at 1:09 AM

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. bonds from the private players which was sold to them in an auction, while QE1 was MBS and other assets that they took from the bank’s balance sheets to their own.

This money is newly created money, and they do create the money out of thin air or out of nothing.

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Winston October 29, 2011 at 9:10 AM

Manshu thanks for your reply it is very useful.

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.

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Manshu October 30, 2011 at 11:05 PM

I think they are fairly trustworthy :-)

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Ramamurthy October 29, 2011 at 1:39 PM

Manshu
you say that the money is created out of nothing.OK.But,how does the money reach the common man?

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Manshu October 30, 2011 at 11:04 PM

This is a great question, and the idea / assumption is that when you get all these funds to the banks they will then loan it out to people to start businesses, buy houses etc. and stimulate the economy through the flow of credit. Now, that didn’t happen so much in QE1 because the banks were afraid of their own balance sheets and would much rather keep the cash with them than suffer further credit losses.

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sk kanta October 29, 2011 at 7:06 PM

i still some more reading to do before i post my comments.

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sk kanta October 29, 2011 at 7:08 PM

i need some more time to do my reading before i post my comments.

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Chirag October 31, 2011 at 10:55 AM

That was quite insightful I guess I had missed this post earlier!

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Manshu October 31, 2011 at 8:18 PM

This is a pretty old post so I wonder how you reached here after so long?

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Ramamurthy November 2, 2011 at 11:53 AM

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. Has any such specific study has been done particulaly with reference to INDIA.? if so, may I pl.have referene to any web site where this info is available?I dont want vauge jargons.I want anaswer in specific Rupees, pl.

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Manshu November 2, 2011 at 9:14 PM

No, there is no such study.

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venkatarathinam November 4, 2011 at 4:12 PM

My question is about black money supposed to be stashed away in swiss banks. if it is true, why can’t we print new currency equal in value to that hoarded and put to circulation. if your answer is inflation ,then the question is even if the original black money were recovered from swiss bank and circulated won’t it inflate our economy like the new currency?

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Lakhan December 12, 2011 at 12:39 AM

I have a same concern and can think it might have to do with agreement between countries . I know the answer won’t be simple or RBI would have already taken action.
Manshu any thoughts on the question by Venkat

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Manshu December 12, 2011 at 1:19 AM

This is a weird notion and I don’t know how you think this will do anything at all – The thing with black money is that tax gets evaded and the government then gets into a deficit for which they have to borrow money and financing that deficit leads to inflation. Printing money equivalent to lost revenues doesn’t solve anything at all – the parallel economy with all the lost revenues is still there and in addition to that you want to just create more money out of thin air!!!

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.

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Himanshu November 9, 2011 at 4:50 PM

Good article. Can you please give me a source that our currency is not backed by gold? Some questions:
1) I saw a movie “money as debt” which stated that bank loan money out of thin air by just feeding the numbers into account and after receiving payment account is terminated and it’s all bank’s profit. Is it true? 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://www.moneyasdebt.net/

2) If we were able to produce as much currency as we want, what was the need of external debt? And can’t we print too much inr, convert to usd, and pay all our debt?

3) If currency has no value, then what determines the total wealth that our country have?

4) Is the value of currency determined just by demand? Does it mean that demand of usd is 45 times that of inr? If not, what determines its value?

Thanks.

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Manshu November 9, 2011 at 7:27 PM

1. I haven’t seen the movie and am not inclined to read about the movie and answer your question. However, from what you say it sounds fiction.

2. Foreigners they don’t accept INR and we import from other countries.

3. We will become Zimbabwe if we were to flood the market with INR. As I’ve written above only countries like Japan or Switzerland who have demand for their currencies can afford to print more and be stable.

4. Currency has value – saying that currency is not backed by gold doesn’t mean it has no value – it means the value is not based on the price of gold. The various currency values are determined by the forex market trade on the various currency pairs.

5. No it’s not 45 or 50 times of that – but it is the demand and supply which is more complex than saying X is 50 times Y.

For the source – you can Google this up yourself and I’m sure you will find numerous articles on the topic – you can stop when you find something that looks authoritative enough.

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Himanshu November 9, 2011 at 8:00 PM

Thanks for answering.

If you don’t want to watch the movie, read this article which is also about the same subject and please tell me if it is true or not. It is about banking system of USA, but I want to know if it happens in India.

And what I was saying is that can’t we print required inr to pay debt, convert it to usd and pay the external debt? What will stop us?

Thanks

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Manshu November 10, 2011 at 8:18 AM

Buddy – the issue with this is you are trying to understand a very complex system with just a movie scene! That’s not wise at all. 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.

Please don’t rely on movies to understand economic systems – it will do more harm than good.

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Himanshu November 10, 2011 at 11:56 AM

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.

Thanks.

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Manshu November 10, 2011 at 8:07 PM

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. That will be a lot better way of understanding these things instead of the method or movies you’re following right now.

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Manshu November 10, 2011 at 8:21 AM

You can’t print money to pay debt because you have to buy the USD from someone willing to sell it and that person / institution will not be interested in selling you his dollars for INR if you flood the market with INR and devalue the INR.

A great way to learn about this and understand this is to read about what happened to the Zimbabwe dollar on this link http://en.wikipedia.org/wiki/Zimbabwean_dollar

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.

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Himanshu November 10, 2011 at 12:00 PM

That is the coolest thing about economics. Nothing is fixed. What someone is willing to pay, becomes the value.

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Himanshu November 10, 2011 at 12:48 PM

It seems there was some problem as I was posting from mobile and the link didn’t come through. This is the article I was talking about. Please tell me if it happens in India.

http://www.hasslberger.com/economy/money.html

Thanks.

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sainath November 11, 2011 at 8:50 PM

hi its me sai….:)
my question is that…… does india print constant amount for every stage ????????how we come to know that other country is fallowing the regulations ??? in the scence how we come to knw if they print more then the requirment???
is there any corroption amoung the people who print money ????what is the procedure taken bfore printing the money ???????can we print more money and make the india as abroad like improvement in the roads, buildin houses to the pooor??????

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Manshu November 12, 2011 at 8:30 PM

This is demand and supply & RBI regularly publishes data on the new currency that comes into circulation. There is no corruption in this and there is no international regulation that any country has to follow. The point that I have tried to make repeatedly here and is lost Ina lot of commenters is that there is no free lunch and you can’t print money in unlimited quantities or it will devalue your own currency and make it worthless.

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sainath November 12, 2011 at 9:43 PM

thanku ……. 4 spendin the time 4 my questions…..it was a perfect answer :) :)

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Manshu November 13, 2011 at 8:44 PM

Okay great, thanks for your comment.

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orly November 12, 2011 at 8:56 PM

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.now that Italy is part of the euro zone and uses euro for its currency,can they print money at will,or any printing of money is governed by the whole euro zone community?
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,

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Manshu November 13, 2011 at 8:46 PM

No, they can’t print the Euro at will and nor can the Greeks. This is a problem as they can’t devalue and export their way out like Argentina.

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madhav November 13, 2011 at 12:43 PM

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. Inflation is not a bad word, in fact inflation has to happen for a country’s economic growth. if there is no inflation, deflation will occur and that will be devastating for any country. The amount of printed money in circulation is kept in check by the RBI with respect to total value of G&S, if the RBI prints more currency than value of G&S, you will have a deficit. this deficit is known as currency deficit, if you print less, than the amount of money in circulation will be less and prices go up. 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. if you have a burgeoning population like ours, we have more mouths to feed than we can raise agricultural production or other value sectors we will have a imbalance in the money supply in the country. Inflation will become like a rising serpent will start pinching your pocket. Now if more money comes into the country, the value of money falls and hence what you get at Rs 10 last year will be like Rs 20/- today. what you see is Rs 20/- but factually it is only Rs 10/- that you are paying. hence inflation again. 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. this becomes a recession, a severe recession leads to depression like American depression of 1931 where the imbalance of money supply and concentration in few hands lead to default crisis. 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.

Hope that explains in short why excess printing of currency is bad

regards

Madhav

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Nirupama Khare November 24, 2011 at 1:04 AM

Hello,
Thaks for this article.It clears of some basic concepts ..so in INdia when petrol cost is rinsing much higher to that of other countries and i have heard it is 50% less means govt is trying to say save petrol or there are different reasons for rising petrol price ?

regards
nk

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Manshu November 24, 2011 at 8:43 PM

That’s not true – in India oil is still subsidized and then taxed as well so it is a bit convoluted, but what you’ve heard is not factual. 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).

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zarrar shaukat December 9, 2011 at 10:43 AM

ANSHU Sir…..can i have your mail id….please!

my Email:zarrar.shaukat@gmail.com

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zarrar shaukat December 9, 2011 at 10:46 AM

Sorry MANSHU Sir….i mistaken in your name ……….hope you can understand that!!!

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Manshu December 9, 2011 at 7:27 PM

That’s fine – not a problem, you can email me using the Contact form but it is more likely that you get a response if you leave a comment on the relevant blog post itself.

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shiva shanmugavel December 13, 2011 at 9:41 PM

Really an awesome article ……………

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Manshu December 14, 2011 at 11:51 PM

Great to hear that – thanks!

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harish December 15, 2011 at 1:02 AM

COPIED FROM ONE OF YOUR READERS-
My question is about black
money supposed to be stashed
away in swiss banks. if it is true,
why can’t we print new currency
equal in value to that hoarded
and put to circulation. if your
answer is inflation ,then the
question is even if the original
black money were recovered
from swiss bank and circulated
won’t it inflate our economy like
the new currency?

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Manshu December 15, 2011 at 1:10 AM

This is a weird notion and I don’t know how you think this will do anything at all – The thing with black money is that tax gets evaded and the government then gets into a deficit for which they have to borrow money and financing that deficit leads to inflation. Printing money equivalent to lost revenues doesn’t solve anything at all – the parallel economy with all the lost revenues is still there and in addition to that you want to just create more money out of thin air!!!

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.

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Sonia December 15, 2011 at 12:09 PM

If you ever wondered where money comes from, how it’s created, and why it’s created in the way it is, then Read – Michael Rowbotham’s “The Grip of Death”

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Sunil Daga January 3, 2012 at 4:05 PM

@Harish and Manshu

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. They have to be either USD, Euro or CHF. And it at all the money returns back to India, we will get dollars which will boost our forex reserves.

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Sunil Daga January 3, 2012 at 4:26 PM

@Madhav

Rightly said.
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.. how the money gets rotated

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Emran January 24, 2012 at 2:39 AM

I’ve never had any economic related book in my hands in my entire life simply because i’m from different profession but this absolutely simple and excellent article taught me everything that i wanted to know about just like a hot knife cuts a butter, yeah it was that easy to understand.

With Love from Pakistan :)

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Manshu January 24, 2012 at 8:34 PM

That’s just great to hear – thank you for leaving the comment.

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Salahuddin January 24, 2012 at 5:27 PM

it was good manshu

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Manshu January 24, 2012 at 8:11 PM

Thanks!

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Somnath January 24, 2012 at 8:49 PM

In this paragraph “So, let’s get back to our earlier example…..” either the number of units or the price should have been swapped! Simple explanation, though. Loved it. :)

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Manshu January 24, 2012 at 9:06 PM

No, it should be the same, we’ve had the discussion in the comments earlier as well, please if you could go through them you will see why I’ve used that.

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krutika January 25, 2012 at 12:11 AM

thank you for the valuable information in its simplest form possible!

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Krunal January 26, 2012 at 12:56 PM

Hey Manshu,

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…

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Manshu January 27, 2012 at 12:27 AM

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.

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Subu January 29, 2012 at 2:05 PM

Great article.. Was very helpful.. But could yu please clarify the other aspect of a country’s wealth – yes i.e., the aspect of ‘Gold’.. Does the amount of gold in a country also has a role to play in it..??

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Rajat Mittal January 31, 2012 at 12:39 AM

Great JOB! MANSHU..

I would like a employee like you with me!

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Arpan February 6, 2012 at 11:14 AM

Hi Manshu,

You have explained it with the assumption that ‘govt prints money and distributes to everybody’. In that case the amount of commodites will be the same and with everybody having more money the prices will shoot up.

Now, lets suppose that is not the case.

Let’s say Indian Govt can print ‘x’ amount of currency (INR) today and value of 50 INR is equal to 1 USD today.

If Indian Govt prints 100x 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.g. USD) with the help of less valuabe thing (e.g. INR)

What stops Indian Govt from doing so ?

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Arun Satish February 7, 2012 at 2:38 PM

From what I know, you cant buy USD with INR in the international market. You have to have either gold or other commodities for buying USD.

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puneet February 8, 2012 at 9:05 AM

u can’t buy USD through xchanging INR..because trading at international markets can only be possible with globally traded assets like gold and global currency like USD..

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Sandarpan April 14, 2012 at 2:04 AM

But say I can afford gold worth x rupees and suddenly I have 100x 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?

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Manoj Kumar May 7, 2012 at 2:31 AM

Hi Arpan .

There is a deposit called “Forex Reserve” which every country maintains to meet its Trade obligations and other requirements of its citizens i.e. foreign travel, medical treatment in abroad etc….US Dollar has the status of the “world’s trade currency”;that mean anybody can use US Dollar anywhere in the world to buy any goods or services.That is why all countries in this world keep majority of their Forex reserve in US Dollar.Apart from US Dollar there are Euro, British Pound , Japanese Yen , Australian Dollar, Canadian Dollar and Swiss Franc which have the place in the forex reserve kitty of the countries.

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.

As far as India is concern;Export, NRI remittance, ECB, Foreign Direct Investment, FII investment in equity and debt markets are the major source of India’s forex reserve.

Now the point is how we can sell our INR to buy USD or gold or EURO or CHF ?? First question comes to our mind is who are interested in our INR to keep it in their reserve or locker ? What is the purpose of exchanging USD,gold or any other strong and stable currency to acquire INR….. 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. So we can conclude that its not in the hands of India to sell INR for USD , it is in the hands of Foreign investor to sell their USD against INR if they feel so…

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Ajai May 24, 2012 at 4:08 PM

Great explanation.. even a small kid can understand this wordings and all explanations are crystal clear:)

Ajai

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Jona February 10, 2012 at 11:07 PM

Awesome!! 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:
1. How GDP of a country is determined and measured
2. How Currency exchange is determined (appreciation and depreciation)
3. What is Sensex 10000 mean
The above are just my curiosity, pl. ignore if you have other already planned topics of your specific interest.
Please keep up with your good work.
Thanks a ton!

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Al February 12, 2012 at 6:28 AM

Printing money does not create wealth, per se. That is fairly obvious.

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 1861. He approached international bankers for money to finance the Northern Army in the Civil War, and they offered him interest rates in excess of 30%. 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.

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shujaat afzal February 14, 2012 at 10:55 AM

hi i just want to ask that how can we calculate a money of country ?
according to its gold reserve?
according to the dollar standards?

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vishal February 19, 2012 at 11:35 AM

so clearly explained! thank you!

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Arun February 22, 2012 at 11:50 AM

Thanks Manshu for a nice explanation…..but i have a question?
Circulating money in the economy after printing causes inflation because people’s disposable income goes up but if the government prints money and uses it to pay its debt to other countries/IMF, will it cause inflation if so then how?

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Arun Satish February 25, 2012 at 2:27 PM

If the US$ is as valuable a commodity as the oil and gold in the international market, that means the US can never get into debt!?
They simply need to print more greenbacks and float it into the int market.
ps: I think thats how they got out of the depression.

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andy March 5, 2012 at 6:57 AM

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.

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Tanjil Kamal February 25, 2012 at 9:58 PM

Dear Friends,

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? Whereas i am rest of sure there is more wealth in this country’s economy is wasted or not properly distributed. 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. On the other hand, if the government does not print more money when it necessary the it creates more poverty like it is happening it western countries like UK, Europe & USA.

Many Thanks

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Parul March 4, 2012 at 1:46 PM

But thn wht ppl can make become rich n there ll b no poverty thn our country ll b developed country

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Parul March 4, 2012 at 1:48 PM

N if there ll be money thn inflation b ll der but it ll b not a loss to economy coz everyome ll rich

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preeti March 6, 2012 at 11:45 AM

i liked the way of presenting the solution of this problem in a very easy n understandable form..now my cinfusion on this is tottaly removed

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abdul March 10, 2012 at 2:29 AM

i used to always wonder why this happens today its clear..thanks a lot

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Manshu March 10, 2012 at 6:34 AM

You’re welcome.

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azi March 10, 2012 at 4:32 AM

Hi,
Thanks for this!Now i know understand why zimbabwe’s economy was in doldrums.But i have an issue here.You say if government prints more money demand will increase and eventually inflation would increase,but can’t government fix a price for all commodities a uniform,static price which would never change,so even if the demand increases the inflation wouldn’t increase it would remain constant.Why can’t government do that and become rich?Why should it let the market to dictate the terms?

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Manshu March 10, 2012 at 6:33 AM

Petrol prices are a good example of why this doesn’t work. 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.

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Sujit Chakraborty March 12, 2012 at 11:30 AM

Thanks.

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Ramkumar March 12, 2012 at 6:02 PM

Really good

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Sweta sinha March 20, 2012 at 6:11 PM

Hi manshu,

this information has really helped me lot in understanding this demand supply and price.
thanks .
Keep posting.

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Sunil Daga March 29, 2012 at 6:49 PM

@Tanjil Kamal,

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.

Noble laureate Milton Friedman has given “K-Percent rule” saying the the amount of money printing shall be equivalent to the GDP growth

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Nandeesh April 11, 2012 at 4:54 PM

Very good article.

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e.raveendra April 21, 2012 at 10:04 AM

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.

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Manshu April 22, 2012 at 8:25 PM

Good idea for a future post. Thanks for the suggestion.

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KIRAN KUMAR April 21, 2012 at 10:53 AM

I LOVED IT VERY MUCH…THANKS….

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Arun Ramakrishnan April 21, 2012 at 1:11 PM

A simple and an informative article. However, i did not understand the point that “at 1 rupee you demand 100 units of a commodity, but at Rs. 2 you demand just 30″. Are you trying to emphasize that with the production remaining the same, if people have more money to buy, then the quantity that they get for the same amount of money before and after(inflation) is less”.

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Manshu April 22, 2012 at 8:24 PM

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.

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raman May 8, 2012 at 8:08 PM

hii….i want to knw dat if lets assume dat there is 7 percent growth in g.d.p and there is 7 percent rate of inflation….then is the country really growing or it is only an illusion….?

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Manshu May 9, 2012 at 12:39 AM

The GDP numbers that are reported are adjusted for inflation so the number that you hear like 5.9% last quarter is the growth after taking into account inflation.

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kalai May 12, 2012 at 11:33 PM

very nice topic
i would like to have few clarification
on what basis a country print money?(i,e amt of money that can be printed for circulation)
who monitors this?
if a country would like to print money whom they need to seek approval?
in that petrol eg you said
when the government subsidizes petrol 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.
to meet out that deficit why do we borrow money why not we print money?

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Xerxes May 15, 2012 at 11:03 PM

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.Am i right?

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Rahul Khandelwal May 23, 2012 at 12:04 PM

As simple as it can be explained…….good artice…

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rajesh May 24, 2012 at 1:30 PM

Just Print more money and give it to Petroleum companaies to recover their losses…
Supply petrol at 40/liter

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Ajai May 24, 2012 at 4:09 PM

Gr8 one:)

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Paul Davies C May 25, 2012 at 8:13 PM

Simplicity in explaining concepts is at the heart of this article. Really informative.

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Kunal May 29, 2012 at 5:32 PM

Good Article!
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.

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Manshu May 30, 2012 at 5:12 AM

That’s not possible…RBI prints money and printing money is really just a figure of speech. This is all electronic and it is not possible to carry it out in the way you are describing it.

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Jayasudha May 29, 2012 at 7:02 PM

Good job…

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Jaspal May 30, 2012 at 12:04 PM

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 ? we always here that the RBI or the Govt will bail out this or the other sector, does that mean they will be printing more currency to support the bail out or they will be adjusting from the treasury.

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Manshu May 30, 2012 at 6:07 PM

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.

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Jaspal May 31, 2012 at 11:03 AM

Dear manshu,

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.

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Manshu June 1, 2012 at 4:26 AM

It’s not that simple that the government asks RBI to print currency and then gives it to someone. Take the Air India bailout for example, the government asked the PSU banks to modify contract terms with them and give them necessary financing. It’s a complex process.

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Anusha Shashidhar June 4, 2012 at 12:05 AM

You explain it in such a simple manner, Manshu! Great!

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Manshu June 6, 2012 at 4:40 AM

Thanks Anusha!

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Umashankar June 5, 2012 at 2:25 AM

Really informative………

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Mayank June 5, 2012 at 2:45 AM

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. prints 1 crore ruppes and instead of distributing it to public, it simply buys US $. Then, as a result India’s ruppe value should increase.
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?

Looking forward to you answer.

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Manshu June 6, 2012 at 4:36 AM

If you buy dollars then the value of dollars will increase right? Because that’s what you’re demanding…whatever has the greater demand will have the greater value also. Do you understand this?

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Panneer June 15, 2012 at 8:28 PM

Excellent Article. Its really cleared most of my doubts.

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D.K.Gupta June 5, 2012 at 3:11 PM

It was very much informative……i think most of the people having their doubt on this topic…..
But it seems doubts have been cleared….This ques. & ans. was also cleared some more……

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anmol June 8, 2012 at 2:38 AM

thanks for above information.

now tell that why does indian govt. borrow money from another country.
and how it is used in india or u may say how it is changed in indian currency…….
what is done with those foregin currency.

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gopi June 11, 2012 at 10:04 AM

Very simple and with clarity! I think more the questions, the better there will clarity!

Thanks………

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dr nabeel ashiq June 11, 2012 at 3:56 PM

hi , so this article i read so question is that now if our country print a hell more currency notes instead of giving to our peoples we use this money outside our country so there will b no inflation in our country and we can bring all needed items to our country ,,, so what is the explanation for this ….

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Manshu June 12, 2012 at 5:15 PM

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.

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chandrra June 11, 2012 at 11:01 PM

thank u manshu sir you have given great informations …. it is very usfull

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Manshu June 12, 2012 at 5:04 PM

Thank you for your comment.

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sharad June 12, 2012 at 4:53 PM

Nice article

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naresh June 15, 2012 at 11:43 PM

So I am a person living in India …… what if i want to invest my money some in foreign currency say GBP or so ??

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Manshu June 18, 2012 at 12:38 AM

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.

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naresh June 21, 2012 at 10:53 PM

Any useful links where i can get some more info about it ?? ………. I’m a beginner so , I really need to get a lot more familiar with all these things before I can do something ……….

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Gargi Aggarwal June 20, 2012 at 9:07 PM

Hey there Manshu ! This is a really nice article. I am a commerce student and I am in my final year of C.A. 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 .

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Durai June 23, 2012 at 9:55 AM

It is very nice explanation Manshu,
also we have to accept the fact that none of us will do as same as SA to get inflation rather we can spend to create jobs or to give subsidies for the industries and Factories to manufacture the goods as well as to create opportunities in conclusion everything was created for our well being in simple words “Government of the People, By the People, For the People”.

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norman June 26, 2012 at 10:40 AM

that’s very enlighting…

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Siva June 30, 2012 at 4:48 PM

Thanks all….!

great contribution from all of you to explore and share the knowledge Mr. Manshu has on the economics for the benefit of seekers like me….

would love to read more and more similar articles from Mr. Manshu and the team…

Thank you all a lot….!

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Manshu July 1, 2012 at 7:00 PM

Siva – thanks! 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:
http://feedburner.google.com/fb/a/mailverify?uri=onemint%2Ffeed&email

Subscription is free.

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Roy July 14, 2012 at 12:01 PM

i think you are wrong.if that was the case,why dont prices of essential commodities go up.u see even if i had lot of money,i will still need only one ipad,and if the cost of the product will go up bcoz of more demand,ok,so print more money.If you can print money at your own will,then there is no fear of any product price increase.

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Winston July 15, 2012 at 7:36 AM

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.

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'Selva July 23, 2012 at 6:16 PM

Hi Roy,
I’ll make it very simple.As he said when everyone are debitted with such a sum of money everyone will be capable of buying an i-pad .in the beginning the price of an ipad were say 25000…now everybody thinks that ipad is essential for them and starts buying an ipad…why cant the person selling it increase the price of it….even if he rises the price(30000) marginally the people wont bother about that ….
and thats how this causes inflation….
this is in the case of an ipad which is not so essential…but when it comes to our daily commodities think of what happens….???\

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Satya March 15, 2013 at 6:30 PM

I believe commodities and fuel are right examples.(instead of ipads). Bcoz inflation is mainly based on daily essentials.
So with 1 crore in every person’s kitty people may purchase more cars and consume higher fuel which is limited commodity. This increases the fuel prices. Similar is the case with food articles such as rice and wheat.
This leads to higher inflation.

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Ruchir July 22, 2014 at 5:04 PM

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. They will become rich only if the I-Pad company supplies one more I-Pad and both of them can own the I-Pad. And that can happen even if no money extra money is printed.

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Naveen S. Kalyani September 13, 2012 at 10:36 AM

“Why can’t a country print money and get rich?”
Technically speaking, any country on this planet can print money and get rich. 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.

Check this out: http://theglobalecon.com/printing-of-money/

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goh September 21, 2012 at 11:30 PM

Great sharing, thanks

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aimul October 15, 2012 at 3:01 AM

Thanks for the article. It was a very good read.

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new bie October 15, 2012 at 4:57 PM

It is kind of balance one has to maintain in economy and whole system works around the theory of “demand and supply” balance.Suppose your income is increased and every member expanded their needs which used to be luxury earlier and hence it shifts the pressure on “demannd” aspect od this swing.Now if “demand” has to be met one has to the production of any commodity needs to be accelerated which in turn increases pressure on other services related to tht commodity (right from its procuring to delivery to the customers) and hence inflation rises with the rising consumption.
Also “rupee” is also a kind of commodity in international market….it is traded for different trading between the countries….if the supply of our “rupee” is abundant than value of our currency comes down and hence the whole trade market suffer.So one has to keep control in printing of the currency.

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tim October 27, 2012 at 2:30 PM

countries don’t really print money though. they borrow it from the corrupt banking system and pay back with interest. presidents have died attempting to print money. if countries could print money they wouldn’t have any debt. the real question is why has such a powerful institution been allowed to operate for centuries? the men behind the worlds banking system are the real terrorists. do some research on the history of money and you will draw the same conclusion.

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Shoeb Khan October 30, 2012 at 11:50 PM

Bro U r wrong, there is term known as Fed Reserve Bank. I guess u might know it. If possible der is a documentary on National Geographic Channel about the Concept of Money Plz have a look and If possible search on Youtube Bras stack: Speacker: Zaid Hameed.

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tim October 31, 2012 at 7:06 AM

the federal reserve bank is a private company owed by the Rothschild family. research “Rothschild”, the system we have under the federal reserve is the same system used around the world today.
here is an excellent video about the history of money.
http://www.youtube.com/watch?v=Zx0vrR2BFp8

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MJ November 13, 2012 at 3:28 AM

COUNTRY GROWTH SPECIALLY INDIA.

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SARKAR December 21, 2012 at 12:14 PM

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..daily, weekly, monthly or yearly? I m sure that lot of people asks this question themselves? Pse let us know

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Ramamurthy December 21, 2012 at 9:46 PM

USA is pumping in money prompting many experts to warn that it would lead to disaster.But,the consumer inflation rate is steady at about 2% since the past 3 years.Any comments please?

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SHIHAB January 26, 2013 at 1:39 PM

hi,

my doubt is , why can’t issue more currency to buy goods from other countries(ie, imports)…not allowing currency to circulate domestically in the country …this way inflation can be prevented..

plz c;arify,,

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Manshu January 27, 2013 at 10:49 PM

Because other countries don’t accept INR from India, they usually demand payments in USD and India can’t print USD.

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SHIHAB January 28, 2013 at 3:28 PM

i mean, why can’t india buy USD with INR from the monetory market??..

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Manshu January 28, 2013 at 8:47 PM

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.

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SHIHAB February 5, 2013 at 9:40 AM

>>>the price of the USD actually goes up because the demand increases for that<<<
***************************************************************************
is 'USD price hike' against INR alone or against all the currency in the world???

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SHIHAB February 5, 2013 at 10:02 AM

in the 2nd case, india can take advantage of it ..right?

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Muthu August 28, 2013 at 9:15 PM

Manshu,
Could you please revert for the Shihab’s last question.

>>>the price of the USD actually goes up because the demand increases for that<<<
***************************************************************************
Is this 'USD price hike' against INR alone or against all the currency in the world???

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Rajib March 25, 2013 at 1:03 AM

plse avoid this type of innocent knowledge…..

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Manshu March 26, 2013 at 6:05 AM

Sorry, I didn’t understand what you said.

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Vibhor January 30, 2013 at 10:04 PM

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.

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Manshu January 31, 2013 at 6:55 AM

It is actually the same thing, and if you see a scheme like NREGA that’s what the government is doing, and that’s at least partly responsible for the inflation that you have seen in the past few years.

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Ramamurthy January 31, 2013 at 8:16 AM

I had previously raised a doubt(21-12-2012) 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.Yet since the last two years the CPI inflation rate remains at 2%.Why please.This doubt has not been answered so far.Can I expect some responses?

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Manshu January 31, 2013 at 8:59 AM

I believe I have answered this question earlier but maybe that was not satisfactory. Here is a link with someone else’s perspective that you may find useful.

http://netrightdaily.com/2012/10/why-hasnt-the-feds-quantitative-easing-led-to-high-inflation/

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Mohit Golchha February 4, 2013 at 10:38 PM

Nice Article..thanks a ton..!! :)

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SHIHAB February 5, 2013 at 9:50 AM

in the 2nd case, india can take advantage of it ..right?

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Dilip March 11, 2013 at 9:52 PM

how Indian currency makes its value. In place of what Indian currency is made

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Ramamurthy March 12, 2013 at 8:37 AM

Dow Jones hit a new high recently of about 14500.This was attributed to the the financial policy of USA which poured a lot of money into the financial system of USA.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?

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Manshu March 12, 2013 at 10:07 PM

Newspapers attribute any market move to anything. This shouldn’t be taken too seriously.

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Ramamurthy March 12, 2013 at 10:30 PM

Then whom to believe.The reasons given are very credible.Can you please let me know whether USA,s economic position justify the DJ index.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.

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Manshu March 12, 2013 at 11:02 PM

Why is the S&P still lower than its previous high? The Fed’s balance sheet has more than tripled in the last 6 years, why hasn’t the Dow tripled? The GDP makes a new nominal high every day, why doesn’t the stock market of every country everywhere hit a new high every day? Japan has been printing money for the last 30 years, why is its stock market 20% of its all time high?

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Manshu March 12, 2013 at 11:03 PM

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’m a bit disappointed that you use this type of tone after I’ve answered so many of your questions in the past.

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Ramamurthy March 13, 2013 at 9:03 AM

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.Again my apologies.
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?

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Manshu March 13, 2013 at 9:19 AM

Sir I am sorry for my harsh remark. I will do a full post on this subject, perhaps next week. I feel that we have a tendency to give the index a lot more weight than it deserves when it is up and even more when it is down. Not every move can be explained rationally and it shouldn’t be too. I will give reasons on my thinking in a full post. I’m sorry I should’ve refrained from making that comment and I will do a full post. Also, I do run ads on this blog and while they don’t make much money I am remunerated to that extent.

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Ramamurthy March 14, 2013 at 9:22 AM

Thanks for the information.By price weighted index I thought it was inflation adjusted.It is not.I did a little probe.DJ is calculated on stock prices of 30 companies.It is not on the basis of market capitalisation. Hence it requires price adjustment to account for stock splits etc.
I also compared S&P 500 historical prices on 3rd March for last3 years with DJ.
Here are the results
Base Year 2003—100
S&P
2011—-113
2012—121
2013—135
DJ
2011—118
2012—-125
2013—136
I am sorry I cant put it into a Tabular form,though you have guided me how to do it.I am not too computer savvy to follow your guidance.

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Palwinder singh March 13, 2013 at 11:06 AM

thanx for sharing this information

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manoj March 29, 2013 at 1:03 AM

I don’t have any knowledge but my brain says that there would any specific path through government would be able to print
by seeing some thing been produce by any individual for example someone make pot .. Now the pot have value in market according to value of same money would be printed and given to pot maker …pot would be taken from him some one who is ready to buy pot would given pot taken money…in this way money would be entering…..pls comment

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Manshu March 29, 2013 at 5:22 AM

No, sorry it doesn’t work like that.

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Ramamurthy March 29, 2013 at 1:04 PM

I am sorry Manoj.I cant follow you. Can you please elaborate?

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Ramamurthy March 29, 2013 at 1:00 PM

In spite of all heavy criticism Ben Bernanke has been pumping in more and more paper money into the financial economy of USA.Stock Market is up.Oil production is up.Corporates are doing well.All positive signs.Has Ben Won?
Do you agree that USA has succeeded in printing money AND also grown rich?

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Manshu March 29, 2013 at 8:57 PM

Yes, I agree that they have avoided major pain by doing what they did, but they can’t go on doing this forever.

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ROHIT April 5, 2013 at 12:46 PM

AWESOME ILLUSTRATON..GR8

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Bala Pillai June 9, 2013 at 1:58 PM

crisp information to digest. no need to be an economist to understand. thanks.

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Gopal June 15, 2013 at 11:09 AM

A simple example that is answer of your question “Why can’t a country print money and become rich?”

you have a saving bank account that having balance of ? 20,000 & have a FDR of ? 50,000. you can print cheques only to the extant ?70,000, not more than this. so it is simple whatever backup you have, you can print cheque and encash it. you have cheque book, why you not write cheque and become rich. Same thing apply to government, they print currency as per their reserves (gold, deposits, etc.)
Hope it clear

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Ramamurthy June 18, 2013 at 1:00 PM

I am sorry,Gopal.It is not clear.

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Yogesh June 20, 2013 at 4:59 PM

Seems Mr.Ramamurthy has a complex knowledge of working of an economy.someone gives the solution while Mr.Ramamurthy comes in with more probing questions.just like devil’s advocate.But it is good.though i have not understand much as I am not economic student but I am fairly interested in working of economics and will use it to my advantage someday.

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Lance July 12, 2013 at 12:47 PM

This guy is making a fool of you. First of all the demand and supply curve he shows you applies for products and money is not a product but a medieam of exchange. Second if we take a look at his arguments that 1 crore is given to everyone then it including those carrying out production and services. Hence the producers and service providers will increase the quality of their products and services using that money. They will charge more money from the consumers because they are providing better and improved quality of products and services and the consumers would be able to pay off due to their increased income. Hence an equilibrium would be created between demand and supply of goods and services. The increase in printing of money wouldnt have any negative effects on the economy. Infact it will result in better facilities and higher standards of living. For example a bus service provider would use the extra money to add A.C and better seating conditions to his bus and chargf more on the tickets. The consumer will pay more as he is no longer poor and has the power of the purse.

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Ramamurthy July 12, 2013 at 10:54 PM

Lance,the man whom you refer as “this guy” has not created this Blog to make fools of others.
He is not making any money out of this from gullible fools.
Coming to your argument you are presuming that all people who receive a dole of Rs 1crore will use that money in creating productive assets.In fact this was the intention with which Federal Bank of USA started pumping money into the sagging US economy.The money went into Stock Market.
Let me give you another example.Number of car owners will shoot up resulting in huge serge of demand for Petrol.More petrol has to be imported for which you have to pay in Dollars.From where do the dollars come?Dont forget.India imports much more than what it exports.So,a dollar may cost Rs 1000 as against Rs60. All the additional rupees the Govt has printed may be used up in paying for Petrol.What is left?Print more?

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Lance July 13, 2013 at 6:46 AM

You didnt addressed on the question that money aint a commodity but a medium of exchange. Second why did the people invest in stock market ? ? Btw Thats consumer behaviour which differs from place to place. Indian wont do that nevertheless taking your car arguement. Well i think you didnt understood what i meant. The prices of other products would increase because there quality would increase. Hence people wouldnt accumulate enough money to buy more cars.

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Manshu July 13, 2013 at 8:38 AM

So Lance, if it is as simple as printing money, and getting rich then why hasn’t any government anywhere in the world in the history of the world done it and improved the lot of their people?

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Ramamurthy July 13, 2013 at 2:49 PM

Lance,you seem to agree that indiscriminate and repeated release of printed money into the economy will result in hyperinflation because you say people will not be able to buy a Car even with what remains out of 1crore cash.
Am I right?
Coming to your reaction to Manshu,s comment, whatever are the causes which lead to high depreciation of Re ,at least now Govt has to take action to see that it will not depreciate furthur.Do you think printing money will do this job?

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Wingman July 13, 2013 at 9:02 AM

Printing money causes inflation. We are living in a low inflation peroid for too long and started to take things for granted. Now we have S&P trading at a all time high, Fed Chairman Ben understand the danger and the word ‘Taper’ start appearing everyday. If printing money is so simple, there will be no poor man on the street. Generation never experience high morgtage payment will never understand the pain.

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Lance July 13, 2013 at 10:03 AM

Why are you talking about history. People in ancient times used to barter. Then gold was used as a medium for exchange. Paper Money is being printed since the last 300-400 years. The first central bank was founded in 1694 by William patterson The Bank of England. The gold coins were heavy and to overcome this drawback Gold certificate were issued instead of Gold coins. This started the tradition of paper money. The bankers soon realized that they could issue more gold certificates than there were gold reserves. They issued ten times more certificates then there was gold. It increased to 20 times. The same system was implement throughout the globe. Now there is only a fraction of gold to back up the printed money. Centrals banks are printing money out of thin air. Fiat Money. So the RBI can print more money for internal growth. India can be rich only when the Indian currency is strong just like all western countries. One rupee should be one dollar. Indian currency is devalued due to the previous conditionalities of the IMF and the market forces after World Bank agent Manmohan Singh passed Globalization , Liberalization and Neoliberalization policies. These IFIs like the World Bank , IMF , WTO , BIS are created for the hegemony of western countries.

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Jane July 13, 2013 at 2:56 PM

Somehow you ignore entirely the role of the Banks which print the money.They pay just the cost price of production,and generally then sell or lend(since no Government can afford to buy their own money outright, its always a debt incurred to the privately owned printers)Usually the money is repaid ,not its cost plus a percentage mark up, but at its face valued incurring enormous dents to the Government /Nation especially when they require more and more .The Governments then need to repay the loan via taxes and charges,so the people really have to buy their money ,which they actually borrowed without knowing it.And its global.And the printers are indeterminate,but private,hidden behind lots of fronts.Without factoring that debt into the equation you really are giving a simplistic and quite unrealistic explanation of the whole debt ,cost of money business.And of course how many countries do you really think can ever actually pay face value for their money to the supplier?

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Ashish August 25, 2013 at 11:46 AM

I think the only exception to this is USD. I have heard that since all global trade esp Oil is in dollar that gives US liberty to print dollars without increasing inflation.
Can someone plz explain in detail how ?

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muthu August 28, 2013 at 12:51 AM

what if govt. prints money and use it for imports (oil). and not giving it to people??

In brief,

govt shall print money and witout giving it to public,( to avoid inflation). y can’t they use it only for purchasing from other countries??

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Ramamurthy August 28, 2013 at 6:55 AM

Muthu
Other countries will not accept Indian rupees.They want dollars.

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Muthu August 28, 2013 at 9:23 PM

Hey Ram,

Thanks for your quick response.

Could you please revert on the below,

I have copied this question from Shahib’s post early this year.

>>>the price of the USD actually goes up because the demand increases for that<<<
***************************************************************************
is 'USD price hike' against INR alone or against all the currency in the world???

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Deepak Agarwal December 22, 2013 at 8:36 PM

Best ever explaination I’ve ever come across. All my queries in this subject almost clarified. It’ll help me a lot.
Thanks

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roy January 15, 2014 at 1:03 PM

So,in short,we need to be poor and then there wont be any huge demand , so there wont be any inflation, what a ridiculous explanation. what i am asking is why should everyone not have access to healthy food, clothing and shelter and why should some accumulate wealth beyond their capacity to spend in their lifetime. So,modern day economics is just fooling people.

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Ramamurthy January 15, 2014 at 3:52 PM

Dear roy
To alleviate poverty you require, among other things,money.All this post is telling you is ,printing money does not alleviate poverty.
So where is the question of modern day economics fooling people please?

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Vikas June 24, 2014 at 5:45 PM

hey, guys anybody can give practical answer on why country cant print money as they want?

If we print money and give it to all then everybody will be rich and will stop to work.Apart from doing this , we can pay and imports oil.Then we will be rich.But we dont do that.Why ?
Please i want simple practical answer.No more long theory.

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Vishal Nair July 11, 2014 at 1:46 AM

Awesome article and easy to grasp .
With what i understood in a layman’s language i have a question.
Why are we taking the example of printing money and GIVING IT TO THE PEOPLE. Why not we take example of printing the money and then government will USE IT FOR DEVELOPMENT which will make profit on what we have printed.By this way the demand and supply stuff will remain the same because we have not elevated the status of the people by giving them extra money.

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Richard Date July 11, 2014 at 3:28 AM

EXACTLY!

The issue of inflation becomes whether the printed money is spent on actual viable infrastructure, which enables economic growth and turns a profit in the macro sense–which creates new demand for the printed money so as to absorb the supply–or whether the printed money is spent on bridges to nowhere, which does not.

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Suhaib Khan December 11, 2014 at 1:27 AM

Why to handover the money to citizens? Why don’t they just print the money and develop the infrastructure of the nation? Better roads, bridges? Changing cities to smart cities? Or what about setting up hydraullic peojects, in 21st Century, INDIA still suffers from power cuts.

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Ashish December 12, 2014 at 10:43 AM

Why do we require to print money to built infrastructure ?
if GOI itself is producing all raw material and building roads, then they dont need money .
But since this task is given to private players, you need to give them money, which inturn are either your citizens or foreign players.
Foreign players will not accept INR and will demand USD.

if its an Indian co. then again its as good as you are printing money and giving it to your citizen.

Remember , the money printed by a country is a representation of how much goods and services you produce.
If you print more money and produce less goods , then it will simply cause inflation.

Eg : say in a country there are 3 ppl, first has 10 Rs , other has 5 Bread and the third has 5 Eggs .

Now since only 10 Rs is in circulation these 3 ppl came to a conclusion by forces of market that 5 Bread cost 5 Rs and 5 Eggs cost 5 Rs .

Now suppose suddenly this country prints 90 Rs more. But this will not change the no of resources country has .
This will simply convert to 5 Bread costing 50 Rs and 5 Eggs costing 50 RS . This is Inflation.

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Richard Date February 13, 2015 at 10:38 PM

Why do we need money to create infrastructure? :)
So you can buy the raw materials, pay to deliver it, and pay the engineers and laborers.

Now, you can borrow the money and pay it back with interest over 20 0r 30 years, which doubles or triples the total cost.

Or, you can print the money, which has some risk of inflation.
IF the infrastructure enables the economy to grow, all the new money is absorbed over time. There ends up being the same ratio of economy to money.
But IF the infrastructure is a boondoggle, and does nothing for economic growth, then you get direct inflation from the new money, since the money supply grows, but the economy does not.

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Ashish February 14, 2015 at 11:46 AM

The question is do we need money to build infrastructure projects. or do we need raw materials and labour.
If the raw materials can be bought by barter system and labourers are willing to work for food directly, we dont need money .

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Suresh July 5, 2015 at 8:41 AM

Best Answer !…

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zenny February 5, 2015 at 10:25 PM

need the syllabus for ri exam

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wani fayaz February 17, 2015 at 11:47 AM

oh bandle of thanx for eradicatng mine confusion which have been crosed for last 6 years, i ‘ve red so many book but couldn,t grasp proprly .

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wani fayaz February 17, 2015 at 12:18 PM

oh bandle of thanx for eradicatng mine confusion which have been crosed for last 6 years, i ‘ve red so many book but couldn,t grasp proprly . But according to my mind is concerned the country should print money not in more quantative bt in few for rural areas instead of urban areas , there z lack of infrastructure in rural areas i,e espcially lack of roads, ,educational institution and facilities, power supply, Health centres so on problems faced who lived in rural areas, to some extent urban areas r developing than rural. For instance if we measure eco. Development on the bases of rural development eg life expectency, literacy rate, social infrastructure etc then eco. Dev.. Rate Of india may b 5%.

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Venki February 27, 2015 at 7:12 AM

hi,
pl clarify my doubt. when a foreign company is willing to set up a production plant in India, they exchange DOLLARS for INR. with this INR, they spend to set up facilities and factories. they produce xyz product and sell in India. Indians pay in terms of INR. my doubt is, how will he take back INR to his country.

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lakshminarayan March 12, 2015 at 4:35 PM

Good article. India has 22,000 tons of Gold and imports 900 tons annually. If any agency, NGO, Company or an organisation mints Gold coins of 100 milligram weight, about 2.2 Lakh CRORE such coins may b minted and the agency would make a profit of Rs.10,000 crores assuming 5% profit.

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umriwad karan April 22, 2015 at 7:21 PM

I totally agree with what this one mint says abot inflation,rise in cost . I would like to thank onemint fir gjving me idea about this topic.THANK U VERY MUCH.

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devshishya May 7, 2015 at 12:27 PM

I want to that is RBI printed money everyday

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Rahul May 18, 2015 at 11:23 PM

In the last graph, Re. 1/- & Rs.2 is interchanged with quantity. Please see below given explanation.

So, let’s get back to our earlier example, and say that instead of demanding 30 units at Re. 1 – you will now demand 50 units at Re. 1 and instead of demanding only 1oo unit at Rs. 2 – you will now demand 120 units at Rs. 2.

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anil patwal June 14, 2015 at 4:46 PM

I have a idea::::Why don’t government provide extra printed money free to those talented people ‘students’ etc who wants to invent something like which they can export to other countries” effects no inflation’demand of our currency’s”economic growth.. Am I correct?

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Al Date June 16, 2015 at 4:31 AM

Well, for one thing, there is no guarantee that the talented people stay in the country or do real work.

If the newly minted money is spent selectively on actually-needed infrastructure projects, the infrastructure stays in the country, and if it is actually needed, it will grow the economy for decades to come.

No reason why they talented people cannot become civil engineers and get paid to design bridges that can last 100 years.

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Om July 17, 2015 at 7:19 PM

In the above article i want to say that if any country print more currency and Government of that country utilized that money on rural development or any irrigation scheme which is under taken by that government.I don’t think any type of inflation or hamper occurred to the financial condition of that country. Ultimately govt. spend our money on this social scheme.

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harry July 21, 2015 at 3:06 PM

If I get rs one crore from the government credited to my saving account I won’t work anymore bcoz m already having
One crore in my account why should I work? Suppose I am currently working in a mobile manufacturing company and getting rs 15000 salary pm. After being credited with one crore in my account I will surely not work for rs 15000. As a result my employer will have to offer me 2 lacs pm and this will increase cost of production of mobile immensely as I am not the only worker but there are thousands of other employees who will get or demand same kind of hike. This will increase the price of mobile from say rs 10,000 to 10,00000.moreover cost of other factors of production may also increase.

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Shivaraj September 3, 2015 at 2:49 PM

I agree that if more money is printed and given away to people, it will only cause inflation. But, I still feel that there are other ways the extra money can be used – E.g., Provide free education, free medicine / hospitalization, improve country’s infrastructure etc.

There could be a counter argument that we may not have enough hospitals to accommodate people if we provide free hospitalization. That may be true. But, then we can at least prioritize it to provide free treatment for life threatening diseases. Or there could be an argument that people may take their health for granted and may engage in drug abuse, smoking etc. Yes, that may be a side effect. But, the value of free treatment would be more beneficial than the negative side effects.

I am just a common man and not well versed in economics. So, just wanted to get feedback on my thoughts above. Do provide inputs on this.

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sai krishnan September 12, 2015 at 1:00 PM

I have doubt
consider a situation in which the government prints money sufficient for an avg life style and distribute it to people who are poor
and the government has the power to determine the price of any produce , so even though the demand rises the price won’t exede so this won’t cause inflation

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avinash trishul November 2, 2015 at 2:16 AM

“So, let’s get back to our earlier example, and say that instead of demanding 30 units at Re. 1 – you will now demand 50 units at Re. 1 and instead of demanding only 1oo unit at Rs. 2 – you will now demand 120 units at Rs. 2.” – This sentence needs to be corrected.

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saroj December 9, 2015 at 8:02 PM

in my view all statement r incorrect becoz india can print too much money n buy all weapons from other country like japan russia,america can lead inflamation in other country n india use necessary money that’s why my country is safe

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Abhilash December 30, 2015 at 10:30 PM

I understood what you said. But i have a doubt. I feel that the demand may not vary with the same proportion as the money everyone gets in bank account. So ultimately if everyone gets more money then it may help.

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Sunil Kumar Shrestha January 5, 2016 at 4:54 PM

I totally agree with what this one mint says abot inflation,rise in cost . I would like to thank onemint fir gjving me idea about this topic.

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