Issues on Inflation - Essay Example

Inflation: An overview: Techniques on which success of a business in modern world relies differ considerably from the ones followed in the past. Thisis because the international market today, is controlled / influenced by things more than just owner’s equity, project feasibility considering the socio-political environment prevailing in the country, mood of the market, availability of shares and an awareness of marketing and business strategies. Whole world is going through a phase of economic recession. Despite much progress in the development of sound marketing strategies, increasing reliability on the use of technology to estimate future plans, widespread awareness of the economic decision making processes, readily available literature on risk management in business and much advanced, organized and computerized methodologies to ensure solid business-monitoring, projects today are incurring heavy financial losses. And the situation is same throughout the world. If we draw an analysis of the trends of the past and present, it would apparently seem that the modern-world businessmen are far immature and less educated in business as compared to so called “experts” of the past. It appears that development in the science and technology has generated an awareness that has adversely affected the practical world. Things are happening in an unexpected way. This proves that something bigger, not much considered / studied, is controlling business in the international scenario, and that is “inflation”. Inflation is majorly responsible for the jammed projects, lessened GDPs, suppressed business, increased loans and this has resulted in aggravating poverty, famine and various other evils in the educationally rich and knowledgeable societies of the modern world. It is the byproduct of inflation that we see people possessing bigger sums than what their forefathers had possessed in their times, still modern-age people are poorer than their forefathers. Inflation as the name suggests, means to expand in volume and decrease in density / value, just like a balloon would expand when air is pumped in it. Apparently it seems bigger when inflated than the size it had been originally, but it becomes light enough to float in the air as compared to the uninflated balloon-material. Likewise, money has increased in amount manifolds, yet it has lost its worth. In other words, the “purchasing power” of money is lost. According to Park (2007), p-544, inflation means a rise in the price of an object with the passage of time or in other words the amount of things that can be purchased lessen with time keeping the number of dollars constant. “Economists generally accept the view that inflation is ultimately a monetary phenomenon.” (Rogers and Wang, 1993, P-37). Causes of inflation: “Increase in taxes and fees leads to inflation.” (Jain, 2010). One of the major causes of inflation is scarcity of resources. As the population all over the world is increasing day by day, number of consumers is increasing in comparison to the limited natural resources. The demand and supply cycle is continuously losing balance. There is a growing demand against a recessing supply. Therefore, only those can access the facility who can pay more for it. This leads to an increase in the market-price of products, and a further decrease in the living standards of poor people. Inflation generates poverty in general. “Another common cause of inflation is a rise in production costs, which leads to an increase in the price of the final product.” (Bocco, 2010). Consequences of inflation: Good business is vital for economic growth and development of a country. For a business to run smoothly, it is very necessary that the owners always have a handsome amount of money at hand to keep things going and to ensure efficient cash-flows from top to bottom level. Inflation directly affects the cash-flow in all businesses running in a country. Since the value of money descends with the passage of time, therefore investors would rather exchange their equity with a currency, whose value would remain relatively stable over time, so that they do not incur losses. As a result, all money required for a business to run gets deposited in banks. This results in ceased projects. A lot of workers loose their jobs as a result and this aggravates poverty. Left with no other option, these unemployed people adopt unjustified and unethical means of accessing money, which adds to the percentage of crime, theft and robbery in the country. On the other hand, even if people plan to invest in business instead of depositing their savings in banks, they would not be able to get loans from banks to invest in business. This is one of the most disastrous results of inflation. Banks have a rosy view about offering loans during the periods of high inflation. Banks are not even satisfied with offering loans with interest because the inflation may rise high enough to cover the profits brought by the interest, resulting in a net loss to the banks. Therefore, inflation plays its role in decreasing investment trend on all levels. Besides, people are not enthusiastic about investing in business, even if they succeed in getting loans from the banks. This is because of an uncertainty about the economy of the project in the future because of inflation. It is not a hypothetical approach to expect the value of money going so down so as to cover the whole profits accompanied with a net loss to the owner. Therefore, people are inclined toward the idea of purchasing foreign exchange so as to secure their capital. The extent of taxes applied on an individual’s earnings considers the net amount of assets. Since inflation gives rise to an increase in the number of money with a decreased value, therefore taxes increase accordingly. The taxes imposed on an individual and inflation are directly proportional to each other. Naidoo, (2008) notes with reference to inflation and its impacts in South Africa in his article that inflation has resulted in such an increase in the prices of the products in market that it has become hard for a financially average South African to purchase a bread. Winners and losers: Inflation brings along with it such an economic redistribution that means differently to people belonging to different trades. There are people who gain from inflation contrary to those who loose from it. Wilson, (1982) mentioned in page- 118 of his book that inflation does not cause an equal rise in price in all industries nor does it necessarily cause a rise in all industries, thus it causes economic harm to some and lends economic rise to others simultaneously. This win and lose phenomenon is observed both on national and international level. When prices of locally produced things rise, this leads to an excessive reliability on imported products which would be cheaper. Thus exports are lessened and imports are enhanced, which brings an economic benefit for the foreign countries as compared to the country suffering from inflation. In the reigns of rising inflation, any individual or organization that lends a loan is at the losing edge in comparison to the other entity that gets the loan. Inflation generates poverty. On the other hand, it helps the poor debtors in a way that it lessens the worth of loan they are entitled to return. The larger the assets / mortgage possessed by an individual, the larger the loans issued by the banks. Accordingly the benefits drawn by the borrower enlarge. The losses are incurred by the banks and other money-lending organizations. Mc Mahon, (2007) interestingly refers to inflation in his article as the “ultimate Robin Hood scheme” which shifts money from the rich lenders to the poor. In the same article, he mentioned that US government, being the biggest debtor, has taken the maximum advantage from inflation. “It is always the case that the biggest beneficiaries of inflation are the entities that get the new money first. Therefore, the biggest beneficiaries are usually the government, the banks, and large speculators.” (Saville, 2009). Conclusion: Too much inflation needs to be discouraged. Though it is right to have a very low percentage of inflation, otherwise deflation may commence, which would bring lots of customers against a limited supply. “A reasonable rate of inflation--around 3- 6 per cent-- is often viewed to have positive effects on the national economy as it encourages investment and production and allows growth in wages.” (Khan et al., 2007). Countries like UK have experienced a boom in inflation from 1967 till 1992. In a report generated by Vickers, (1999), it is stated that prices in UK have been relatively stable from 1700 till 1967, when UK experienced a sudden rise in inflation generating a 9 % annual rate of inflation, and this trend continued till 1992. However, prices have become relatively stable since 1992. UK has been successful in reducing inflation manifolds through redesigning her monitory policy. Vickers, (1999) mentioned in the same report that UK designed a new constitution for her monitory policy shifting the charge of decision making about interest rate from the Chancellor of Exchequer to Monetary Policy Committee(MPC) of Bank of England. This took place after the general elections held in 1997. This distribution of powers proved successful in decreasing UK’s annual rate of inflation from 9 % to between 2 % and 3.5 %. Hence, people in charge all over the world need to foresee the future challenges associated with the rapid growth of inflation rate and need to take necessary actions, like UK’s government did, in order to maintain stable prices of products in their countries, and leave a healthy and wealthy state for their generations to live in. References: Bocco, D., 2010. “What Causes Inflation?” 14 March 2010. Available at: http://www.wisegeek.com/what-causes-inflation.htm. [Accessed 16 March 2010]. Jain, E., 2010. “Inflation and Its Consequences on Common Man.” Ezine articles. Available at: http://ezinearticles.com/?Inflation-and-Its-Consequences-on-Common-Man&id=1293376 [Accessed 16 March 2010]. Khan A. A., Hyder S. K. and Ahmed Q. M., 2007. “Identifying causes of high inflation.” Dawn group of newspapers. Available at: http://www.dawn.com/2007/01/15/ebr8.htm. [Accessed 16 March 2010]. McMahon, T., 2007. “Who does inflation hurt most?”. InflationData.com. Available at: http://inflationdata.com/inflation/Inflation_Articles/Who_does_inflation_hurt.asp. [Accessed 16 March 2010]. Naidoo, S., 2008. “The Consequences of Inflation.” www.sevafrica.com. Available at: http://www.sevafrica.com/Business/consequences-inflation.shtml. [Accessed 16 March 2010]. Park, C. S., 2007. “Contemporary Engineering Economics Fourth Edition.” Pearson Education, Inc.: New Jersey. P-544. Rogers, J. H. and Wang, P, 1993. “High Inflation: Causes and Consequences.” Pennsylvania State University, P-37. Available at: http://www.dallasfed.org/research/er/1993/er9304c.pdf. [Accessed 16 March 2010]. Saville, S., 3 March 2009. “Depression And Inflation”. Available at: http://www.gold-eagle.com/editorials_08/saville030309.html. [Accessed 16 March 2010]. Vickers, J., 1999. “Price stability in the UK.” Glasgow Trades House Lecture, Strathclyde University, 26 May 1999. Available at: http://www.bankofengland.co.uk/publications/speeches/1999/speech44.pdf. [Accessed 16 March 2010]. Wilson, G. W., 1982. “Inflation Causes, Consequences and Cures.” Indiana University Press: Bloomington, IN. P.118. Available at: http://www.questia.com/PM.qst?a=o&d=70502347. [Accessed 16 March 2010]. Read More