Today I will be sharing a cartoon that I found extremely useful in my understanding of money and inflation. Yes, a cartoon! I had read many of the concepts of money, monetary systems and how they affect, you and me and the common man on the street in multiple books. This video by Paul Grignon, Money as Debt, summarizes these concepts in an extremely easy to understand manner. Must see!
Paul Grignon’s Money as Debt video
If you have trouble seeing the video, visit Youtube to see the video. Click here.
Other than notes and coins is there more to what constitutes money?
We grow up learning that coins and notes constitute money. But in reality, in our monetary system, there is more. Debt is also money as you just saw in Paul Grignon’s video. He has given a great background which is useful in understanding what is happening in India. If you still have not seen it, do see the video.
Money as debt in India
Figures are in Rs. crore.
|Date||Currency with the public||Demand Deposits with Banks||Time Deposits with Banks||‘Other’ Deposits with Reserve Bank||M3 or Broad money||Currency as % of M3|
|02 Nov 2012||1065149||677579||6203120||1773||7947620||13%|
|23 Nov 2007||525113||480083||2670774||4784||3680753||14%|
|14 Jan 2000||194060||133320||759271||2976||1089628||18%|
|24 Jan 1992||60100||49671||196493||1801||308065||20%|
|27 Apr 1951||1399||579||324||28||2330||60%|
This is select information from data that RBI publishes regularly. The M3 column is actually the total money in India. And did you notice the funny thing about currency? It is just 13% today. Yes, the rest is debt in the system. All the loans that individuals and companies take are utilized in paying others and end up in others’ deposit accounts (savings or current) or stay in the individuals’ or companies’ own accounts as deposits until they are used. That is what you see as the other columns which make up the balance 87% of money supply in India.
And there are some interesting observations.
- Currency as a percentage of money supply is only decreasing, just like what Paul Grignon’s Money as Debt video talks of. Credit does multiply wildly.
- It was at 60% in 1951, had reduced to just 20% post-liberalization in 1992 and has decreased over the years.
- In the last 5 years, from 2007 to 2012, money supply has increased at a compounded rate of 16% every year.
- Now you know where the price inflation is coming from in India. I had covered government debt and inflation in previous articles. You can read them here, here and here.
- The important addition to what I had discussed earlier is that the banking system also adds to the money supply. So, not only the central bank, but public sector and private banks contribute to money supply creation in India.
Please share this article with others. This is knowledge which most of us do not learn in schools and colleges but profoundly affects us throughout our life. Inflation hits our pockets. High levels of debt in the country are unsustainable beyond a point. Poor fiscal governance affects you and me. Once we know, we can take appropriate steps to protect our wealth from unbridled inflation. But it starts with being aware.