INFLATION

Inflation means an increase in available currency, and is manifested by a general increase in prices. In the nineteenth century, economists and employers put forward an argument that prices are determined by wages and salaries, so that every wage or salary increase causes a price increase. However, income levels influence currencies through consumer spending. When incomes increase, people spend more. Higher demand for imported goods increases demand for foreign currencies and, thus, weakens the Rupee. All governments have held the workers responsible for price increases, and urged them to moderate their wage claims if they want inflation to be curbed. The price for which the worker sells his labour power; so that when prices rise generally due to inflation, wages go up just like other prices.

          Currency is printed year-round to meet both for increasing demand for more bills and to replace those that wear out and are pulled from circulation. Inflation is the result of the action of governments printing and putting into circulation a continuous stream of thousands crores (ten Arabs or ten Billions) of notes and notes of larger denominations, i.e. an excess issue of currency. It is this action which causes an inflationary rise of prices and it is governments, who carry sole responsibility - they and nobody else. The Indian Rupee was pegged to the British sterling from 1926 to 1966 at INR 12.33 to 1 Pound. The peg was changed to the US Dollar in 1966 at INR 7.8 to 1 USD. It may be noted that the exchange rate in 1948 was at INR 3.30 to 1 USD and between 1950 and 1966 it was steady at INR 4.76. Immediately after Pakistan war with India in 1965 the exchange rate doubled and went up to INR 7.50 to 1 USD. It moved to INR 8.39 to 1 USD in 1975 and kept on increasing. In 2011 (April) it was INR 44.17 to 1 USD and it continues to rise unabatedly. In 2015 (27 Sep) it was INR 66.16 to 1 USD. Governments have pursued this policy of inflation for more than three decades in the absurd belief that it would prevent unemployment.

The value of a country’s currency is linked with its economic conditions and policies. Apart from inflation, the volatility in the foreign exchange rates between two countries depends upon numerous macro-economic factors that have different degrees of importance to different economies of the world. Some special and exceptional factors affecting the rates may also exist in the case of different countries. Following are shown the common factors on which the foreign exchange rate depends: (a) flow of imports and exports between the countries; (b) flow of capital between the countries; (c) fluctuation limits on exchange rate imposed by the governments of the countries; (d) merchandise trade balance; (e) rate of inflation in the country; (f) flow of funds between the economies for the payment of stock and bond purchases; (g) relative growth rate; (h) employment (i) short term and long term interest rate differentials;  (j) performance of equity markets; (k) foreign exchange reserves; (l) price of agricultural products (which depended on climate) and other commodity prices and (m) cost of borrowings.

The US and European economy was affected by the Great Recession of 2007-08, “a period of reduced economic activity with negative GDP growth.” However, Poland, Slovakia, Moldova, India, China, South Korea, Indonesia, Australia, Uruguay, Colombia and Bolivia escaped a recession during that period. In the U.S., persistent unemployment remained, along with low confidence, the continuing decline in home values and increase in foreclosures and an increasing federal debt inflation and rising petroleum and food prices. The economic inequality made the rich the richer and the poor the poorer. The wealth concentrated at the top level while the poor were burdened with debts and they struggled to maintain their living standards.

I am of the opinion that in order to tide over the calamity, the governments are justified in printing notes / dollars to finance rural employment programmes, to  provide free education, free medicine / hospitalization, to improve the country’s infrastructure with the building of national highways, broadening and lengthening railways and big ports for shipping, airports and develop renewed energy. 

Did the US government’s printed dollar notes and circulated it among the lower income group to tide over the recession in 2007-08? People are aware of it.

The people around the world had faith in the dollar currency and they too shared the brunt of US recession. If the US government continues the same gimmick, it is only a matter of time before people lose faith in the US Dollar, leading to a domino effect in the economy.

Excerpts from

NEED OF THE HOUR

by

Joseph J. Thayamkeril

Lawyer, Kochi, Kerala, India.

josephjthayamkeril.blogspot.com