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

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

In this example â€“ 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

In this example â€“ you want to supply just 50 units at Rs. 1.20, but when the price shoots up to Rs. 2.15 â€“ 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 â€“ 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

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

What happens when your income rises? â€“ 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 doesnâ€™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 everyoneâ€™s savings account with Rs. 1 crores, and if you donâ€™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 â€“ you will think that you have become rich, and will start spending like crazy. If you used an air conditioner for just the night â€“ 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, letâ€™s get back to our earlier example, and say that instead of demanding 30 units at Re. 1 â€“ you will now demand 50 units at Re. 1 and instead of demanding only 1oo unit at Rs. 2 â€“ 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 â€“ it would look something like this.

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 â€“ people have this â€œwealth effectâ€ 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 thatâ€™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 â€“ becoming competitive â€“ 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.

The contest here has come to an end, and I wanted to compile a list and publish on the site, so that everyone can verify that their name has been entered, and counted correctly as well.

Here is a table that shows all names. Please look for your name, and see that Iâ€™ve counted your entries correctly. If there is mistake let me know immediately, and Iâ€™ll fix it. Continue reading “Thank you and please verify your contest entry”

## This is a good time to think about risk

I’ve seen a lot of people compare the returns from fixed deposits, or bonds to shares in the past few days, and more than anything else this shows that people have been lulled into forgetting how sharply the markets can fall.

Before you say that the average return from a diversified equity mutual fund in the past five years has been 13 odd percent, so it’s better than a fixed deposit – remind yourself that a diversified equity mutual fund can go down fairly steeply, quite quickly.

And very soon you could be worried about return of capital, rather than return on capital.

If someone around you is talking about returns without talking about risk – remind them of the crash of 2008, and show them this picture.

The share market is inherently volatile, and it will be foolhardy to ignore this volatility, and talk about average returns.

Now, one final thing about investing in debt.

It’s good to diversify your debt investments as well. In fact, there is no good reason to invest in the debt of just one company, or keep a fixed deposit in just one bank.

You could concentrate a large part of your wealth in one company’s stock hoping that it turns out to be a future Infosys, but there is no reason to invest a large part of your money in the debt of just one company.

If it goes under – you stand to lose all your money – and if it doesn’t – you still get the 10 or 11% coupon payment.

This is what some GM bondholders learned the hard way when it declared bankruptcy, so it’s better to learn from their mistake, and spread your debt investment as well.

## Can a holiday package be claimed for LTA exemption?

He told me that a holiday package can be claimed for LTA exemption, but the only thing to keep in mind is that LTA exemption is for spouse, dependent children, dependent brothers or sisters only, so if you have taken a holiday with your extended family or children who are no longer dependent on you, then you can’t claim LTA exemption on that part of the expense.

Another thing is that since LTA exemption can be claimed only for travel – if your holiday package included hotel and sightseeing (which it normally does) – you won’t be able to take an exemption for that.

I thought this is a good opportunity to update my old post on LTA tax, so here is that post updated with new information.

The following points need to be kept in mind while taking the LTA or producing bills for it to getÂ  LTA Exemption:

Can We Claim LTA Every Year?

One of the most common questions about LTA is whether it can be claimed every year or not? The answer is Yes â€“ you can claim LTA every year, but you will not be able to claim LTA exemption ever year.

Other Points About Tax On LTA

1. If you do not wish to claim LTA in one particular year you can have your employer carry forward your LTA for the next year.
2. A supreme court judgment said that it’s no longer mandatory for employers to collect travel bills.
3. You can get your LTA exempt twice in a block of four years. Right now the block that is relevant is 2010 – 13. This block is decided by the Government so does not have a bearing on when you start your job and also these blocks are calendar years and not financial years.
4. The bills can be air, rail or even a private rental company however the exemption is only for domestic travel so an international ticket wonâ€™t do.
5. The bills have to be for a journey that has been undertaken when you are on leave and should be for you and your family that is spouse, children and dependant parents, brothers and sisters. Your family canâ€™t claim the exemption if you have not accompanied them.
6. If you and your wife both get LTA â€“ both of you canâ€™t claim exemption for the same travel but you can avail exemption independently for different travels. So effectively between the two of you, you can claim exemptions four times in four years.
7. If for some reason you fail to claim LTA exemption in the bucket of four years â€“ you still have the option to claim exemption in the first year of the next block.
8. Only travel bills can be used for LTA exemption, so a hotel bill canâ€™t be produced for claiming LTA exemption even though you might have stayed in the hotel during your leave.
9. LTA can only be claimed for the shortest distance between two places. So if you are planning to travel from Goa to Mumbai then you will be allowed exemption on tickets from Goa to Mumbai and back. You will not be allowed to produce tickets that are via some other place like Mumbai to Hyderabad and then from Hyderabad to Goa and so forth.
10. LTA can only be claimed on tickets or rented private vehicles, you cannot show petrol or diesel vehicles for your own vehicles and then claim exemption on it.

The above are just some of the points that need to be kept in mind while discussing LTA exemptions.

I never liked tax, and have never been good with it, so there are many chances of a mistake, so please correct me if you see anything wrong.

Let me give you an example of why I don’t like tax. Here is this thing from the Income Tax Act that tells you how many children you can claim exemption for:

HAS ANY CHANGE BEEN MADE IN RULES FOR EXEMPTION OF L.T.C. TO DENY THIS BENEFIT TO LARGE FAMILIES?

Yes. Exemption of L.T.C. shall not be available to more than two surviving children of an individual after 1 st October 1998. However, this shall not apply in respect of children born before 1.10.98 and also in case of multiple births after one child. If an employee has before 1.10.98 even five children or more, exemption would still be available to all children. However, if an employee begets a third child after 1.10.1998, the L.T.C. for the third child will not be exempt.

You can thank them for not suggesting adoption!

## How to unsubscribe, and links

Some time during the last week OneMint crossed 5,000 subscribers, and I’m really happy about that.

However, at the same time – I realize that some of you don’t read the email newsletter, and simply delete it every day, and would like to unsubscribe.

If you want to unsubscribe, simply reply to this email asking me to unsubscribe, and I’ll remove you from the mailing list.

Now, on to some good links this week.

India’s government has a spineless reshuffle @ Riding the Elephant

The magic of buy and hold vs trend @ The Big Picture

Cartoon: Free gift from insurance agent @ Smart Singh

Buying term insurance online is cool @ Ranjan Varma

Deciphering and solving the inflation crisis @ Ajay Shah

Aadhaar hits another milestone @ PIB Press Releases

I wish I could write catchy headlines, but I canâ€™t, and this is all Iâ€™d like you to do.

• Enter the contest if you haven’t already

Enter the give â€“ away to win a free financial plan from Hemant Beniwal

If you were unaware of the give-away that has been going on in here, then head over to this post about it and enter it now.

This is a financial plan, and it doesnâ€™t mean that you need to earn a lot of money to get financial planning done. Everyone needs a plan â€“ if you make money and spend money, then you need a plan, and do already have some sort of a plan on which you act.

Read this post to figure out how you can enter the giveaway.

I see that only a handful of you have used both methods for an entry. I have highlighted the names of the people who have double entries, but for those who donâ€™t â€“ I recommend increasing your odds, and clearly specifying that you have done both so I can put two entries on your name.

I have collected all the entries so far, and created this list out of it. The names in bold are people who have done both.

If you entered the contest â€“ please verify that your name is in the list, and is correctly placed for one or two entries. If you see a mistake, leave a comment and Iâ€™ll correct it immediately.

 S.No. Name 1 Swaroop Rao 2 Aditya Modi 3 Deepak 4 Deepak 5 Thirumalaisamy Rajasekaran 6 Gaurav Malik 7 Chirag 8 Aniruddha Pathak 9 Khalid 10 Murali 11 Sandesh Goel 12 Sandesh Goel 13 Radha Krishan Tripathy 14 Swati 15 Sandip Mahajan 16 Sandip Mahajan 17 Kunal 18 Aery 19 Aery 20 Pallavi 21 Pallavi 22 Prakash T 23 Ashok 24 Nisha Malhotra 25 Akhil Agarwal 26 Vitus Fernandes 27 Bunny Singh 28 Vamsi Goli 29 Deepak Sanghi 30 Monty Shah 31 Arvind Bhave 32 Arvind Bhave 33 Ashish Gupta 34 Harsha Chandrashekar 35 Sanjib Paul

Good luck to all of you!

## Reader Question: Tax Saving Fixed Deposit or Infrastructure Bond

Kunal still has some way to go before he reaches his 1 lakh limit, and he left a comment about comparing a tax saver fixed deposit with the 80CCF infrastructure bond, and which one works out better.

I responded to that question, and since I’m a bit lazy today I thought I’d use that response as a post for today.

Here are my thoughts:

Personally, Iâ€™d opt for the fixed deposit, and here is my thinking behind it:

1. First and foremost, you get tax saving FDs that pay higher than the bonds, and there is a possibility that even these rates might get hiked in a few more days. So even though the absolute sum wonâ€™t be very high, one point in favor of the tax saving fixed deposit.

2. When you have the option available within your 80C (1 lakh) limit then use that up, and keep the option of infra bonds open in case you find that you can invest in them later on.

3. You will have to wait a little bit to get the investment proof, and then some people have faced the issue where the allotment advice has been sent to their old addresses, or the bonds are in the wrong name, or other issues to produce proof of payment.

4. There are some other issues that people have faced like a person wanted to close their Demat account, but since the infra bonds they owned were locked â€“ in â€“ they couldnâ€™t do it right away.

5. The bank fixed deposits are more secure than the unsecured infrastructure bonds, although a situation where such companies will come to a point where they default on their bonds is unlikely.

So, Iâ€™d personally make a decision keeping all these points in mind.

What do you think? Does this make sense? Would you do things differently or have to add anything?

## Tax Saver Fixed Deposits with High Interest Rates

Updated on Jan 2nd 2013.

I updated my tax saver fixed deposits page today, and I thought I’d create a separate page to record some of the better paying interest rates on these tax saving FDs.

With that in mind, here is a list with some of the best interest rates on fixed deposits that are covered under Section 80C that I could find.

I’m sure there are some that I have missed, so if you know of any banks that pay well, please leave a comment or drop in an email, and I will update the list.orted List

Bank Interest Rate
City Union Bank 9.50%
State Bank of Travancore 9.00%
IDBI Bank 9.00%
Indian Overseas Bank 9.00%
Vijaya Bank 9.00%
Bank of Baroda 9.00%
South Indian Bank 8.75%
SBI 8.75%
Karur Vysya Bank 8.75%
Bank of Maharashtra 8.75%
J&K Bank 8.50%
Central Bank of India 8.50%
Kotak Bank 8.50%
Canara Bank 8.50%
Punjab National Bank 8.50%
ICICI Bank 8.50%
Axis Bank 8.25%

This is just a list of the best tax saving fixed deposits, but those are not the only instruments that offer you tax saving benefits. There are other instruments and this easy to understand graphic explains them to you.

## If it’s too good to be true, it probably is

Last week a reader emailed me letting me know about a call he received from someone with a Delhi phone number.

The caller claimed to be with a big financial institution and said that they have a scheme going which works as follows:

1. Invest Rs. 50,000 upfront, and get a 5 gram gold coin free.
2. Get Rs. 115,000 as full and final settlement after 5 years.

A 5 gram gold coin is worth ~ Rs. 11,000, so effectivelyÂ  you’re investing Rs. 39,000 and getting Rs. 115,000 at the end of 5 years, which translates into an excellent return of about 24% annually.

The reader insisted that they mail him the details or email him because he was suspicious, and rightly so, and the caller said that he can’t send him the details because it’s a secret offer only for a chosen few!

The caller hung up after repeated insistence of seeing any paperwork, and it sure looks like a con game to me.

Have you been approached by an offer like this, what do you make of it?