You must be in a day-in and day-out struggle to meet your financial needs. For just a few bucks more, stretching beyond has almost become the norm for many. Why the government doesn’t mint more to solve the financial problems of millions – the thought often crosses our minds!
The story is not simple. A hell lot of hand-in-cash may be gratifying for you but it would not add value to your wealth. When you land in the market with that cash bundle, you again face the same crunch as the exorbitant commodity price is waiting to give you more shocks.
How much money within the prevailing economic scenario of the country could make you financially stable is greatly unpredictable. Your entire life would be spent in solving this riddle unless you understand the basics of economics!
Printing more money means high inflation and even Super-inflation:
Let us take the following examples:
- Post World War I, the Weimar Republic of Germany was forced to issue banknotes worth 2 Million marks!
- Of late, Zimbabwean currency has set a record of getting the maximum number of zeros printed on a bank note due to the hyper-inflation of Zimbabwean dollar ($100, 000, 000, 000, 000,). What this highly valued Zimbabwean note fetched? A house? A luxury car or a superb real estate property? No. It bought a less than a roll of toilet-paper!
So it is evident, printing more money is not going to solve your problem unless there is a balance in the supply demand scenario.
Understanding the demand supply scenario:
The price which a customer is willing to pay for a definite quantity of good is called demand while supply reflects the quantity of goods offered for sale at a specific price. Effective demand again entails the paying capability of the customer according to his/her desire. If the person does not have the desired paying capacity for particular goods, it cannot be called as a real demand.
- When the price of a commodity increases, the consumers’ demand for it decreases. The consumer will not be inclined to pay extra bucks for the same commodity.
- The demand shift can occur due to increase/decrease in earnings or price control policies.
The supply factor is roughly based on the following:
- The price of commodities is directly related to the quantity of supply.
- Higher price encourages more production with extra allocation of resources.
- Technological advancements may also increase the supply without increasing the price.
The pricing factor:
It represents the willingness of the consumers to pay for a good based on the demand and supply. It is a sort of tug of war that exists between sellers who try to maximize profit from their produced goods and consumers inclined to pay less for the same.
Again, the attempts of profit are determined by the demand. If price of the goods soars, the consumers’ demand reduces. If the consumers’ are not willing to pay the high price, the supply automatically gets reduced.
The market always tends to find the equilibrium price for the benefit of both the producers and consumers, and this equilibrium is constantly shifting due to changes in the demand supply scenario.
Minting more money is inconsequential:
If government pumps more cash into the economy, the consumers will have more money. This would raise the demand. The supply would be given a push to meet the growing demand causing a steep rise in price because it would also increase the production cost as a whole.
The extra cash would do no good because it will be spent to meet the rising price of commodities. It causes inflation. You pay more for the same quantity of a commodity. The inflation effect is harshly felt in a society with a high disparity in wealth distribution.
Problems that follow inflation:
So in a scenario when you are not gaining much with the extra cash, there are other issues that are likely impact your financial situation sooner or later post inflation. We have seen this in Germany when people used to get paid twice a day to buy their daily grub due to severe price fluctuations.
You are likely to face the following:
- The value of your savings will fall.
- Transactions become difficult
- Confusion and uncertainty over financial security prevails
- Government minting money to pay off national debt raises inflation eroding the value of government bonds.
- People’s confidence in government bonds sinks due to value erosion. The government would not find suitable investors or buyers of the bond.
- Investor confidence will diminish rapidly in case of uncontrolled inflation inviting further economic turmoil.