Is money produced or created?

Money is one of the most controversial and yet the most important concept of our human existence .Yet your parents will never give you a lesson on this extraordinary concept. And I bet you must have heard everything on the religious issues, gods and mythical stories that are yet to proved. Most of the parents don’t know a dime about it and rest think it is the root of all evil, so they don’t discuss it. Unfortunately I was one of them. But fortunately I was inquisitive enough to find out myself most about it. I am writing this because of the basic misunderstanding among people, even people with extraordinary intelligence. This makes me sad.

So let’s clarify few notions, which many know and those who don’t know will have an enlightening experience.What exactly is money? Money is just a means to exchange goods and services. Goods and services that you can use in your daily life. What is the value of money? It is its capacity to buy goods and not how much you have. By money we refer to paper currency also called fiat currency but they are not the same thing, I will tell you about that later. Fiat is a legal binding command. The value of the currency is not a magic and certainly not arbitrary. Its value is legal binding command behind it. If the legal command behind it is weak and incompetent then the currency will be weak because a paper currency has no intrinsic value unlike gold. Legal command forces more and more people to use it thus giving it a status of an instrument of exchange. That is its value.Let’s suppose you are shipwrecked at an island with two friends. Now one friend has 50 breads, you have a million rupees and the third person has lighter. Who is the worst-off? You will be worst off since they can just start exchanging goods with each other. Why they need your money, they can light a fire out of wooden logs rather than from your paper currency. So what I am trying to say is never just go on the amount of money someone has. But how much goods that amount can buy. This is a simple concept but this concept lies at the heart of inflation, foreign exchanges, investments etc. Many people just don’t understand why some countries have 1, 00,000 unit currency notes and some have only 100. It is just because overtime higher unit currency went through the shipwreck type conditions more than the other currency. Thus value of currency dropped and they have to increase the denominations of currency as it is awkward to give 100 hundred unit notes to buy bread. This is called inflation in modern terms. Inflation is just a process where too much currency is chasing few goods. That is the growth of currency is higher than the growth of the production of goods. This is what happened at the island (of course that is an extreme condition and something which we call hyperinflation, where the faith over currency just vanishes). Limited goods and increasing money supply. What happens to the value of the money? It takes a dip. That is Inflation for you.

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SNAPSHOT OF INDIAN ECONOMICS @ OCTOBER

Indian industry grew by 9.6% during the April- July period of 2007-08, a rate slightly lower as compared to the growth clocked in the same period a year ago. However, the sequential monthly growth numbers for 2007-08 show a gradual slide, observed since April 2007. This was an expected turnout that came as a result of measures exercised (tightening of credit flow) to anchor the rising inflation. Industrial growth slipped from 13.6% in April 2007 to 7.1% in July 2007 and remains dim compared to the growth in industrial output during the corresponding months of previous year.

In April- July period of 2007-08, only six of the 16 industry sectors outpaced the growth posted in the same period a year ago. In the remaining 10 sectors, 9 industry sectors were laggards while one turned negative. Growth of machinery & equipment, leather, food products, rubber, plastic petrol and coal, jute and wood products overshot the growth seen in the corresponding period of last year.

Six core Infrastructure industries

The infrastructure industries too could not escape the spells of monetary tightening. The six core infrastructure industries grew at 6.1% during April- July period of 2007-08 as against the 8.7% rise in the corresponding period of last year. Power sector grew at 8.1% in April- July period of 2007-08 as against 6.2% in the corresponding period of 2005-06.

Telecommunications

The most promising sector, telecommunication continues its northward trend. Total number of telephone subscription is on its way to attain the landmark 250 million connections.

Mobile revolution’s gaining popularity pushed up the subscription to such high levels, much ahead of the use of landline. In August 2007 mobile phone connection had the highest addition of 8.31 million breaching 200 million mark to date. Teledensity has reached 21.20%.

Inflation Trends

In August 2007 inflation averaged at 3.9% for the month compared to that of 5.1% recorded in the same month a year ago. Lower inflation was mainly due to softening of prices in the manufactured items and fuel prices. Despite moderation the inflation, concern over the prices of primary products still remains high.

Stock Market Trends

The upswing in the indices continues, mainly supported by the recent global developments. These developments include rate cut by the US Federal reserve, strong macro economic fundamentals, better corporate earnings all of which has been adding fuel to investment-sentiments.

The Sensex crossed the 15000 points in August 2007, further witnessing rallies in quick successions that distinguished from the earlier ones. The BSE index rose from 16000 to 17000 points, covering 1000 points in just 6 trading sessions. On October 9 2007 the 30-stock index sensex had the largest gain by 788 points, zooming past the 18000 mark. The market may see some correction, with temporary pull out, but the long-term investment mood of investors will remain unaffected. As on 5^th November, it was 19590 and few days back crossed the 20K too.

Fiscal Trends

Indirect tax accounted for more than 60% to the total tax collected in August 2007, with collections from excise and customs together contributed little above 40 % .

During the five-month period (April-August) 2007–08 revenue receipts recorded a growth higher than the growth posted in the previous year. Revenue from tax sources accounted about 60% of the total revenue. Fiscal deficit increased from Rs 90678 crores during the five-month period of the last fiscal to Rs 103338 crores in the corresponding months of the current fiscal year, showing a rise of 14%.

Exchange rate

For five months, upto September 2007, the monthly average rate of exchange of Indian Rupee against the USD was contained between Rs 41/40. For September 2007 it was Rs 40.3, however the Indian Rupee began to slide from Rs 40.88 to a rate below Rs 40.00 without any pause in the last trading sessions, touching Rs 39.74. The appreciation has been more due to weakening of US $ in the international market. The central bank had to intervene in the forex market to check any sharp Rupee appreciation.

In September 2007 the monthly trend of Indian Rupee against the Euro was in contrast to that of the Re/ USD trend. Rupee showed weakness in the concluding trading sessions against the Euro, before steadily sliding to Rs 56.3 from Rs 55.79.

Foreign Trade

The impact of the appreciating Indian Rupee against the US $ dampened the growth momentum of the Indian exports. During the April–August period of 2007-08 Indian exports recorded growth of 18.3 % and this was slightly lower than the growth registered a year before. Imports grew at 31% during the period widening trade deficit to USD 32.5 billion in April – August period of 2007-08 as compared to that of USD 19.9 billion recorded in the previous year.

Exports in the coming months will continue to post moderate growth in the wake of pressures, of, much unfavorable rate of exchange and slowdown in some of the major economies.

source: FICCI

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INFLATION:PROBLEM FOR ASIAN COUNTRIES

Few days back I was visited on Chinese NBS website and find an interesting fact which is very similar to our country problem that’s inflation and money inflow. Money inflow is not a problem but sometimes it creates very worse situation, same thing is arises in India and china i.e. INFLATION.

According to China's National Bureau of Statistics (N.B.S.) released financial data for the third quarter. The data showed China's economy was growing slightly faster than expected, but that persistent inflation may curtail future growth. Because Beijing has limited options for reversing this trend, inflation may require some important political changes.

A Growing Problem

According to the china's N.B.S., the third quarter ended with an inflation rate of 6.2 percent, just below the ten-year high set earlier this year. This level of inflation is high enough to cause concern. Moreover, it is unlikely that the official rate is the real rate. The Chinese government maintains a system of price controls for many goods, including gasoline. The price of oil on the international market jumped from US$65 to $85 per barrel during the third quarter, while the price of gas at China's pumps has remained relatively constant. Mainly china’s monetary policy and other strategic policies are secrets and unkown to other countries.

Factors responsible for Inflation growth:

Growth in the price of agricultural commodities. As global oil prices have surged, more and more farmers have dedicated their crop of wheat, sugar, and corn to the production of ethanol. As an increasing percentage of the crop is used for ethanol, less is available for consumption, resulting in price growth.

Only a few years ago, the average Chinese citizen drank five liters of milk per year. The figure now stands at 25 liters per year. As China demands more milk, both dairy and cattle prices will naturally rise.

Tactics to minimize the exchange rate: Chinese citizens are not allowed to hold foreign currency. When a Chinese manufacturer exports his products to the United States, he is generally paid in dollars. Yet, he is not allowed to keep the foreign currency. He must hand it over to the government in exchange for yuan. This allows the government to retire dollars from circulation. As dollars on the international market become scarcer, their price goes up. This allows the government to keep the yuan weak relative to the dollar, which benefits the export sector.

An inevitable consequence of this policy is that growth in the supply of yuan in the domestic market is tied to growth in the export sector. As exports grow, the money supply grows; as the money supply grows, there are more and more yuan chasing the same goods; inflation cannot help but follow. Exports grew by 27.1 percent in the first three quarters of the year, 0.6 percent higher than the same period last year. China's foreign exchange reserves have swelled on strong exports to roughly $1.5 trillion, and are growing at roughly $1 billion per day. At this staggering rate, it is clear why inflation is spiraling upward.

Additionally, the National Development and Reform Commission (N.D.R.C.) has expressed great unease with the current levels of inflation. According to Xinhua, "Zhu Zhixin, deputy director of the N.D.R.C., warned that the risks of an overheated economy remained, and preventing excessive rises in consumer prices should be a major macro-economic control priority." Officials in the Ministry of Finance share this view, and have been trying desperately all year to curtail inflation.

Attempted Solutions

The four policy levers at their disposal are: raising the interest rates, raising reserve requirements, issuing government bonds, and easing restrictions on investing abroad. In principle, raising interest rates and reserve requirements will decrease investments, while issuing bonds will soak up excess liquidity and easing restrictions on outbound investing may send the excess liquidity abroad.

The government has already raised interest rates five times this year and has raised reserve requirements eight times. Nonetheless, investment in the first three quarters of the year grew 25.7 percent as banks funded 170,123 new investment projects, 18,151 more than the number of projects that were funded all of last year.

Can Do

The Chinese government can get a handle on inflation in two ways: either by changing the market conditions or by changing the political culture. Unfortunately, due to the current ineffectiveness of monetary policy tools and the irrational exuberance of Chinese investors that are fueling the bubble, there are not many options for a market oriented approach to reining in the bubble. This seems to indicate that the government can either wait for the bubble to burst, or they can precipitate a change in the political culture.

In this situation, I believe that our expectation or vision 2020 would be achieved because comparatively our government, RBI and other institutions are really working hard to streamline the system with the growth rate of market and for curbing inflation. In this quarter inflation in our country was 4% comparatively very lower than china.

sources:

WWW.PINR.COM

CHINESE NBS (National Bureau of Statistics ) Report