Actually, the point is not so much about gold standard or dollar standard, in international trade, or simply money in local markets. The point is keeping the value of denomination intact………, i will complete it later. Being a Ricardian, and a follower of many more, but as a student of economics i would like to share what Ricardo said about the discipline. He said the subject-matter of Economics is to explain re/distribution of income. Skewed or un-skewed, i do not know. But statisticians like un-skewed and symmetrical graphs, a figure following other and a point following other. Therefore, completing the above line, the point is keeping the value of denomination intact so that the distribution of income according to ones ability becomes less skewed and faster. It does not matter that the population has figures like $1 billion or $1 a day. But we are all constrained by the working-hours a day regardless of our ability to satisfy the demands.
If the value of denomination keeps changing it will take more time to distribute the fruits of hard work evenly. And, this is what happens with money due to inflation. What inflation does is that it reduces the value of money if income does not rise in the same magnitude. One stand on inflation says that it helps distribution of income but we rarely find examples where income increases simultaneously to offset the effect of inflation and if it does happen it happens later, and that’s a circle, vicious or not hard to say. I think it vicious. And, we end from where we start.
The question is why Central-Banks increase money supply if it devalues money? The rule that follows here is, if the supply increases, it will devalue the asset, be it gold or dollar or rupee. The question regarding the current recession is that, where did all the dollar go if it did not reach the banks again? The thing that happened during the Great-Depression and in Japan in 1990s, happened again in American recession and, the result has been liquidity-trap, in all the three instances. What the liquidity-trap does is that it increases the asset demand for money and people, since interest-rate on deposits due to low economic activity becomes zero, keep money as an asset rather than a means to assets. Precisely, the incentive to save and invest becomes zero. People in this kind of situation, liquidity trap and low inflation, either expect that prices will fall further or interest rate will increase in future, and then they will use their reserves to get benefit from the situation. But in the face of this kind affairs for a considerable period of time when inflation do not fall further people do not find it worth while to keep money for purchases later and start purchasing or they wait for interest rates to increase so that they deposit money in banks and earn interest income. There is one more concern and that is security of the money. Nobody keeps large amount of money at his home due to the threat of theft.
The implication of this kind of affairs is also worth noting. If people start purchasing it will directly add to inflation and if they start depositing money it will indirectly add to inflation through the purchase of consumer durables later. Therefore inflation is inevitable in the process of growth and development. And, then there are others who just save and deposit for increasing scores, their consumption is stagnated, but they are crucial from the point of investment. But investment without anticipating demand is not possible. Therefore, in the chain of profit and growth generation demand comes first. But in money economy money supply or purchasing power constitutes the demand. Now can we say that supply creates demand?
If the value of denomination keeps changing it will take more time to distribute the fruits of hard work evenly. And, this is what happens with money due to inflation. What inflation does is that it reduces the value of money if income does not rise in the same magnitude. One stand on inflation says that it helps distribution of income but we rarely find examples where income increases simultaneously to offset the effect of inflation and if it does happen it happens later, and that’s a circle, vicious or not hard to say. I think it vicious. And, we end from where we start.
The question is why Central-Banks increase money supply if it devalues money? The rule that follows here is, if the supply increases, it will devalue the asset, be it gold or dollar or rupee. The question regarding the current recession is that, where did all the dollar go if it did not reach the banks again? The thing that happened during the Great-Depression and in Japan in 1990s, happened again in American recession and, the result has been liquidity-trap, in all the three instances. What the liquidity-trap does is that it increases the asset demand for money and people, since interest-rate on deposits due to low economic activity becomes zero, keep money as an asset rather than a means to assets. Precisely, the incentive to save and invest becomes zero. People in this kind of situation, liquidity trap and low inflation, either expect that prices will fall further or interest rate will increase in future, and then they will use their reserves to get benefit from the situation. But in the face of this kind affairs for a considerable period of time when inflation do not fall further people do not find it worth while to keep money for purchases later and start purchasing or they wait for interest rates to increase so that they deposit money in banks and earn interest income. There is one more concern and that is security of the money. Nobody keeps large amount of money at his home due to the threat of theft.
The implication of this kind of affairs is also worth noting. If people start purchasing it will directly add to inflation and if they start depositing money it will indirectly add to inflation through the purchase of consumer durables later. Therefore inflation is inevitable in the process of growth and development. And, then there are others who just save and deposit for increasing scores, their consumption is stagnated, but they are crucial from the point of investment. But investment without anticipating demand is not possible. Therefore, in the chain of profit and growth generation demand comes first. But in money economy money supply or purchasing power constitutes the demand. Now can we say that supply creates demand?
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