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Who benefits from inflation?


 -- Published: Tuesday, 21 October 2014 | Print  | Disqus 

By Manish Thatte

 

A good government and healthy society is one which encourages courage, honesty, values and thrift. Borrowing and living beyond your means is not a sign of a healthy society. It also indicates that something is wrong in the way in which the state is being governed.

 

What is inflation:

 

Inflation quite simply is an increase in prices across the board for many goods and services in an economy. This is called price inflation.

 

Alternately, inflation may also be thought of as the erosion in value of an economy's currency caused due to money printing by the economy's central bank. This is called monetary inflation.

Monetary inflation may or may not cause price inflation.

 

What constitutes inflation?

 

Suppose we are having an inflation of 10% per annum (as we commonly have in India). What is the cause of this inflation?

 

A small Part of it originates in the increase in prices across the CPI basket (oil, energy, food), but most of it is due to unbacked expenses by the government (budget deficits) and fresh issue of credit without any real financial asset or income source backing that credit.

 

Increase in the CPI basket goes to the energy producers, commodity producers and food producers (farmers), which is benign, even desirable.

 

But most of the increase (inflation) is just coming out of thin air, in the sense, that the government is issuing fresh credit, issuing doles of money and subsidies to sections of society it favours, by way of the unbalanced budget (budget deficit).

 

This is what is dangerous for the economy and more importantly, morality of the society. The Government needs to balance its budget to reduce this component of inflation and needs to get its priorities right.

 

Who benefits:

So, which sections of the society benefit the most from this inflation? It is the banks, which receive the doles of money and credit directly from the Reserve Bank. Next come the borrowers. After all, it is on behalf of the borrowers that the banks receive these doles of monies. People closer in the receiving line to the newly created money benefit the most. Also, medium and big industries who have easier access to paid consultants and loan agents ;) ...the banks are ever ready to give loans at very favourable rates to these entities.

 

Also, as time goes by, the real value of the loan goes on reducing (in terms of purchasing power), whereas the income rises in line with the inflation. So, the actual repayment burden is reduced for the borrower.

 

This is a heady combination like a potent drug. Once you get into a habit of borrowing, you are going to be addicted.

 

Who loses:

The government claims to benefit the small business, the marginal farmer, the landless labourer, the poor and the destitute by its policy of inflation. But it so happens that these very class of persons are the most removed from the sources of new money. It is said that Banks dont give loans to those who need them most, if it looks like you dont need a loan, then the bank is most eager to grant you a loan. One of my friend recently told me that when he applied for a small business loan, on the basis of his existing income, the bank refused, but when he applied for loan to purchase a big SUV car, the bank very eagerly granted him the loan. So, small business (productive activity) does not qualify for a loan, but a wasteful Car qualifies. The honest Savers loose out too. I have seen so many small common folks save money from their hard earned income and put it in a bank fixed deposit and government bonds. But inflation steals from them unseen. They dont even realise that whatever money they have saved will have the same or a reduced purchasing power when their deposits and bonds mature.

 

What strategy to follow to prosper in a inflationary regime?

The answer as you guessed it, is right. Borrow lots of money... Become a society of borrowers. This is what the general plan is. Borrow money for frills and thrills and mortgage your integrity. Car Loan, Home Loan, Marriage Loan, Foreign Tour Loan, Education Loan... All types of loans are available.

 

But how long will such a strategy be successful?

Production and productive activity and saving of any excess income is what builds real hard earned capital. In the absence of an increase in productive activity, how are the loans going to be repaid? That is a sure way towards financial bankrupcy. But the government has a way out of that one too. Issue more loans to repay the existing loans. But that is the way for moral bankrupcy.

 

This is indeed a very sad state of affairs, wherein, savers are financing wasteful expenditure.

The government needs to wake up, and fast. Only counting the growth in GDP and the size of the economy and trying to increase GDP at any cost is a simpleton's view.

 

Bhutan:

Bhutan is a small Himalayan Nation. Our Prime Minister Mr. Modi visited it as soon as he was elected prime minister. The Bhutanese have a very different definition of progress.

They dont count their progress in terms of GDP growth. What measure they have is a GROSS HAPPINESS INDEX ...

 

A few years ago, India as a whole, too was like that. Its not too late still. We can still measure our progress in terms of Gross Happiness instead of GROSS DOMESTIC PRODUCT. There is no need to compete with anybody in the world in terms of GDP.

 

To conclude, it is the unscrupulous borrowers who benefit from inflation and the thrifty and moral savers who are penalised.

 

manishjagdishthatte@gmail.com

Facebook: www.facebook.com/goldstandardindia

 


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 -- Published: Tuesday, 21 October 2014 | E-Mail  | Print  | Source: GoldSeek.com

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