The US is rich because it has more printed money in circulation and India is poor because it has less printed money in circulation. This is all there is to know about modern economics. Everything else follows from this simple principle.
How can we answer the question (starting from the principle): Why doesn't India print more money and become rich? The answer is simplicity itself: The government of India doesn't have the courage to print more money. In other words, they are poor because they are cowards.
If you have not hit the next-button by now, you are certainly screaming, "Doesn't this idiot know anything about inflation?"
I am not an economist by profession but like all of you I am an economic being and I have some commonsense ideas about economics. First, let us see what is inflation.
Inflation is a fancy name for the process of governments printing money and handing it over to the wrong people, i.e., people who don't need that money to meet the necessities of life, instead they use that money to indulge in the luxuries of life. If the government of India printed money and gave it away to the really really poor people, who would use it to only purchase necessities of life, then there will be no inflation. But this calls for courage and poor countries are governed by cowards. If they were not, they won't be poor.
Technically speaking, inflation is the difference between the printed money in circulation and the goods and services which that money can purchase. If more printed money is available than goods and services in supply, the monetary value of goods and services will rise and this increase in price is given the name inflation.
Why is it that when money is printed and given to the needy it doesn't create inflation but if given to the rich it does?
To keep inflation in check, when new money is printed, goods and services have to be correspondingly created. The key is to see how the process of creating new goods and services differs as new printed money is given to the rich or the needy. The rich spend money to buy one type of goods and services, and the needy another. Not all goods and services are equal, even if they are priced equally—some goods and services are more equal than others.
The needy spend money to purchase food, clothes, houses, education, transport, municipal services, etc. The rich spend their surplus income on gambling (share market included) and soft prostitution (media in all forms included). The money spent by the needy goes directly to build the infrastructure which supports the economy, and also the parasites of gambling and soft prostitution. The infrastructure is created by engineers, educators, trades people, retailers, and problem solvers. For economic growth there can never be enough of infrastructure builders but even one gambling or soft prostitution provider is one too many.
We have thus far enunciated the principle of the present day economy and its twin inflation. Let us now try and answer two important questions.
1.
Can we explain or understand varied economic activity in the light of this principle?
2. Is the present day economic
arrangement the best one? Can we propose an alternative economy to improve on it?
First, let's look at the connection between varied economic activity and the principle.
As recent as about two hundred and fifty years ago, India, China, and Japan were fabulously rich. (An article in The Atlantic Monthly 1908 explains how India became poor.)
Although there was currency used in those economies, it was not a printed money economy like the present one. There were two important distinctions: (a) much of the trade was barter, and (b) businesses did not borrow money on interest to expand their business.
One might argue that the decline in those economies (and the rise of the present one) is a conclusive proof of the superiority of the present printed money economy. That would be true if war and military buildup were made an integral part of the economic arrangement. Chinese economy declined owing to excessive war mongering and Indian economy declined due to it's unpreparedness for war and eventual inability to defend itself against the European colonising forces. Those economies declined due to external factors. Asian economies were peace-time economies, which had economy as a means to a much broader and varied life.
Superior military machines colonised most of the world and then systematically dismantled its infrastructure by unfair taxation and by forcing cash-crop agriculture on rural economies. Taxation based on printed money economy is ruinous for barter economies not used to borrowing printed money on interest. Cash-crop agriculture destroyed the staple grain infrastructure causing famines, genocide, and complete economic devastation.
A superior military machine doesn't have to be a superior economic power. The recent case of the USSR is an example of a bad economy which was a superior military power occupying almost half of Europe, from after the second world war till 1991.
The decline of Indian economy under the British colonial rule is a text-book example of how printed money economy can lead to genocide in alternative economies.
Now coming to the present, let us see what explains the continued slavery of the colonies who were granted independence over fifty to sixty years ago? Two reasons: (a) the prime reason is the cowardice and corruption of their governments and (b) the secondary reason is the use of the printed money by the rich nations to purchase the labour of the honest and skilled citizens living under these corrupt regimes. In other words, printed money is not making poor countries any poorer but it's helping rich countries get richer. Poor countries are poor because they are cowards. No rich country can stop them from printing money and distributing it to its needy citizens.
Colonial powers had superior military machine but they were by no means richer than the countries they colonised. As a matter of fact they were substantially poor. Their economic situation is epitomised by what Robert Clive said during his impeachment. He said something like, "I am amazed at my modesty in answering impeachment charges laid on me by this parliament. My pension, as fixed by one tiny state in India, is one-sixth of the gross national income of your country."
The colonial powers had built their military machines using printed money, taxation, and brutal state apparatus. But even they hadn't learnt (or didn't want) to extend the principle of printed money to enrich their country as a whole. Their wealth was concentrated in the hands of a few rich and the common mass lived a miserable life. This poverty of the masses, as we all know, provided the fertile soil to the communists to sow the seeds of revolution.
The US wealth is only a hundred years old phenomenon. It was triggered by the assembly line revolution of Henry Ford. The US achieved a distribution of wealth not in the least because it made the productions of the goods cheaper but because it had to produce them in huge quantities to make it cheaper. This compelled them to find buyers for those goods. No buyers, no assembly line, no cheap goods. Henry Ford didn't just stop after inventing assembly line manufacturing, he increased the wages of his workers and they in turn became consumers of the goods assembly line manufacturing produced.
The principle says that rich or poor is simply the amount of printed money in circulation—nothing else. There are economic theories which argue the availability of natural resources as a basis for wealth or poverty. An example is given of the UK which has iron-ore and coal mines in proximity. This is not entirely true. Nature is so generous that resource factor doesn't significantly influence prosperity or poverty of a country. Take the example of resource rich Africa and resource poor Japan.
Henry Ford in his book My Life and Work has taken it as axiomatic that natural resources are infinite and its productive use is the only thing needed for prosperity. This has been borne out in modern times. In industrialised countries like Australia between two to five percent of its population produces enough food not only for the entire nation but heaps left over for export and even feeding a country as populous as India.
The fabulous wealth of the US is an outgrowth of printing lots of money and putting them mostly in the right hands, i.e., in the hands of engineers, builders, farmers, and trades persons.
In one week in October 1929, average share prices fell about forty percent, triggering a decade of depression in the industrialised economies of that time. Unemployment reached about thirty percent, causing starvation and ruin for many families. How can this happen at the mere drop in share prices? Crops don't care what the share prices are, so how can people starve to death when the share prices are lowered? A house doesn't care how much it is priced at, it provides shelter regardless. Minerals and other natural resources don't refuse to come out of the earth because someone is paying less for them. Here is a great example of everything remaining the same (nothing much can change in a week), but for the printed money and yet bringing terrible poverty to even the rich nation of the US.
The poverty and misery of the depression years is real, so how did it actually happen? It is certain that many small businesses, who were the backbone of the national infrastructure—transport operators, farmers, trades persons—must have borrowed on interest large sums of money both to buy essential stock for their trade and invest in the share market. When share prices fell, banks recalled the loans which could be only repaid by selling their stock-in-trade and thus closing down the business. Once trucks, tractors, farmland, machinery was sold or repossessed by banks, wants and goods which could supply those wants were separated and one couldn't reach the other thus starvation, unemployment, and all that. The economic activity in the 1920s which led to the crash of 1929 was akin to printing money and investing it in gambling (share market), instead of giving it to the needy.
It must be noted that in spite of the share market crash in 1929, banks and other financial institutions reported a record profit in that year.
Ultimately the Great Depression was conquered by the US government by starting large number of infrastructure projects like, the interstate road network, i.e., literally printing money and giving it to the needy.
In the week starting on Monday 19 October 1987, share prices fell around the globe—Hong Kong 45.8%, Australia 41.8%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5% . This crash which was just as severe as in 1929 didn't cause wide spread devastation. As they say, it mostly provided a correction to the market.
The reason for almost no misery in human terms following the 1987 crash was because, by then, most of the governments had taken over the task of providing the infrastructure to the society, removing it from the vagaries of businesses operating under heavy borrowing on interest. As long as the infrastructure was working, wants and goods to supply those wants were being matched and the society continued to tick. Unemployment in many industrialised countries reached ten percent or somewhat higher but that was mostly the reduction in jobs which facilitate gambling for people who have too much money. For example, people stayed put in a house a bit longer, purchased less shares and other superfluous goods, thus providing less commission for the brokers, agents, and other gambling providers.
Looking at it this way, one might almost agree with the ex-PM of Australia, Paul Keating, when he said, "It was the depression we had to have."
In this economy where printing money and then distributing it as wages is the main thing, one might ask, how are the salary levels set? The most important consideration in deciding salary level is the nuisance value of the employee. People get paid in proportion to their ability to hinder the smooth flow of printed money; a secondary consideration is how much human misery they can cause. In other words, people get paid a percentage of printed money that passes through their fingers. This payment is to keep their fingers greased so that they let the printed money flow and not restrict it by squeezing their fingers. Remember that the economy works by printing money and distributing it—it will not work if a few morons choked the flow of printed money.
The governments of the industrialised countries are under great pressure from their voting constituents to deliver prosperity. How do they manage it? They do it by printing money and distributing it to their voters. You say, "Surely it cannot be that simple!" I can assure you, it's that simple.
No one in their right mind can expect governments to print money and distribute it, even though governments want to do just that. This disbelief enables governments to print money and distribute it on interest. If people didn't agree to pay the interest, believe me, governments will give it to you without any interest, as has recently happened in Japan.
As governments sit idle, letting banks print money and distribute it, what's happening to its twin inflation?
It takes about five percent of the population to provide all the food, another five percent to provide all the goods, and maybe another ten percent to provide all other essential services. The rest of the economy provides nonessential services but generates employment for the majority of the people. Once certain level of employment is reached, it becomes easy to print money and distribute it as higher wages. This gives government a so called objective way of distributing money. Remember that governments have to distribute money, high level of employment gives them an easy way to do so. Governments have been also very clever in making sure that the infrastructure items are fully secure all the time. They take help from the police force and military (e.g., to keep oil supplies flowing) in this vital task. The formula is - keep infrastructure growing, print money, and distribute it. There is no magic to it.
In the last six to seven years house prices have doubled, and many other goods and services have increased in price. Is it that higher wages are being cancelled by increase in the prices of goods and services? I think not. Higher wages are generating surplus income in the industrialised countries. Then why isn't inflation shooting up? BRIC - Brazil, Russia, India, and China - is the answer. Surplus printed money from industrialised countries is purchasing goods and services from BRICs for a much lesser price. This is enabling industrialised countries to get cheaper goods and services and also sell their surplus goods and arms to BRICs.
Before BRIC countries realise how easy it is to print money and distribute, there is a golden opportunity for the printed money rich countries to print money even faster and purchase goods, services, and skills from the BRIC countries and enslave them forever.
If BRICs are clever, they will comfort the industrialised nations so that they all become gamblers (euphemistically called investors) and the users of soft prostitution, leaving all infrastructure work for the BRICs. Then BRICs can choke their arteries, crash the value of their printed money, and live happily ever after!
Of course there is a third alternatives where the rich countries start distributing printed money to the needy in poor countries, just the way they do to their citizens and then we will all become rich. But I will have to see to believe that rich countries will actually do this.
We will all become rich and stay rich provided the present economic framework is stable. This economic order has routinely gone through boom and bust cycles. As a very wise man said: "There can be no competition unless there is a surplus of goods and services, and this surplus will generate boom and bust cycles forever." These cycles have not been so acutely felt during the past few decades because of the growing international markets. Surplus from one market can be sold in some other unsuspecting market. If and when all are rich, with an equal ability to defend themselves and fight injustice, it may not be possible to dump the surplus.
Apart from the difficulty of competition-surplus twins, we already have printed money-inflation twins. As long as printed money is lent out on interest, inflation will continue. Inflation doesn't let anyone rest, even if you have a load of printed money you know you cannot rest on it because it's value is continuously falling, and thus starts the cycle of "it's never enough."
Is there an alternative to get away from these two terrible twins?
Prophet Mohammed has already given a solution and business class in India adheres to this principle very strictly: Money shouldn't be lent on interest. This is the first important point. The second is that instead of printing ever increasing amount of money, prices of commodities should be reduced as more productive machinery and larger labour force enters the market. Finally, for governments to undertake large infrastructure projects, governments should issue bonds, to the participants in the infrastructure development, which entitle them to a share in the profits.
This is an alternative economy without any inflationary pressures and without a class which only invests, i.e., gambles, and does no other productive work for the economy.
I will answer the final haunting question: How can you stop prices from rising in times of scarcity? I say: Scarcity of what? Remember well, all scarcity is artificially created to exploit others and profit easily. If governments are vigilant and honest, they will be able to keep open the supply lines of infinite resources that mother earth has provided for us. In reality there is no scarcity.
In the alternative economic order, people will purchase goods with a view to using them and not making a profit at a future date. This will free up large parts of our brains to solve pressing problems and enjoy a carefree life.
It's all very simple. Don't be a cynic about the simple nature of the economic theory, enjoy its simplicity. Professional economists may know in their heart that it's that simple but they will never openly admit it, just as no learned pundit will feel comfortable preaching that raama-naama is the be all and end all of all our efforts.