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Demonetisation of 500/ 1000

November 14, 2016 by Sandeep

Burning currency = Transfering money to government.

There have been messages doing the rounds to transfer money to the Army accounts (which could be a fake account) and an impression is created that if somebody burns money, it gets wasted.
At any point of time if you burn currency, it automatically gets transferred into the governments account. Or in reality the money gets distributed to each and every person having money. Let me explain to you how.
Suppose there is a country with 100 people and every person has rs100. So the total amount of currency in circulation in the country is 10,000 (100X100). Now, suppose the government prints another 10, 000 and starts using this money to get different developmental works done.
So now the total currency in circulation in the country is 20,000. When this happens the value of the 100 that you hold decreases by half and it is worth 50 now.
So anything for which you used to pay 100 before, you will now have to pay 200. This is how price rise happens. You might have noticed in your real life that, something that used to cost 10, about 20 years back, now costs 150. Almost 15 times more, because the government have been printing additional currency into the country for the past 20 years.
This is how the economy works in simple words. So, now if people are burning currency, the value of Rupee in your pocket is worth more than it used to be before...

Now ofcourse, price rise depends on a lot of other factors like demand and supply, imports and exports done by the country, environmental changes etc.
However if the price of gold, real estate is continuously increasing as much as 15-20 times in a 25 year period, there has to be new currency circulated into the market.
This printing of money or introduction of new currency into the country happens through a complex process and there are ofcourse safeguards and systems involved. I have not gone through the technical details as to how exactly this happens. My main aim is to show you the larger picture and explain to you how price rise happens on a long term basis due to the introduction of new currency in the country.
Having said that, price rise due to printing of currency by the government may not necessarily be a bad thing. It is argued by economists that inflation is essential for the smooth functioning of the economy.
Now the question is, how well is the government able to ensure that money gets distributed in a way that people are not left out.
In 2012 the number of people in India living below poverty line was about 22%. This brings me to my next topic. Why are there so many poor people in India compared to many developed countries.
Simple answer - Lack of a minimum wage law. This is the topic for my next blog post... Stay tuned.. Thanks for reading. Do let me know your thoughts in the comments below.

Please share the message with as many people as possible, so that people are aware of how the system of currency and economy works.

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