Inflation, printing money and a young mind

“Nothing much, Dad. I’m just reading the newspapers… What is this budget thing that everybody has been talking about lately?”
“The government prepares a statement of income and expenditure, Son, just like we do for the household every month, but they do it every year. In a nutshell, that’s what it’s all about.”

“Just like we do, Dad?”

“Yes, Son, with one significant difference. Unlike the common man, the government has an exit route when income is inadequate to meet expenditure. The government can spend more than it earns and run up what is called a ‘budget deficit’.” “How’s that, Dad? You keep telling Mum to live within your income… Cut your coat according to the cloth and all that jazz…”
“Yes, Son. Fortunately, when the government doesn’t have enough money, they can simply print some more – as much as they need. Don’t you wish we could do the same?”

“Wow! Is it as simple as that for the government?”

“Not really, Son. There are lots of factors involved – foreign exchange rates and import bills to be paid, for instance… But, simply put, unless the increase in money supply is accompanied by a commensurate increase in production output, this could lead to runaway inflation.”

“What’s wrong with that, Dad?”

“Inflation affects the common man more than anybody else, Son, because his income rarely keeps pace with inflation. Even worse is the plight of pensioners and fixed-income earners”

“Fixed income earners, Dad..?”

“Yes, Son. Those who earn fixed amounts every month – like the salaried class and those who depend on interest earnings for their survival. The rate of inflation is already higher than what can safely be earned on a fixed deposit.”
“Hey, now you’ve got me stumped… What’s the connection, Dad?”

“The real value of a fixed income earner’s earnings is reducing every day. Even those who have invested their money in banks will find that, even after adding interest, they can buy less with the money they have saved. Thanks to inflation, their money is diminishing in value with every passing day, Son. Theoretically, it makes more sense to spend today than to save for tomorrow. This is a disincentive to saving.”

“So, why save then?”

“You don’t realize, Son. If everyone pulled out money from savings and started spending like there was no tomorrow that would increase the money supply and intensify the inflation problem.”

“So, what’s the solution, Dad?”

“Inflation needs to be brought under control, Son - by focusing on curbing avoidable expenditure and reducing the budget deficit. Look at our defence expenditure, Son. I think this is the only significant item that destroys rather than creates. Without it, there would be hardly any deficit and inflation would be brought under control.”

“Surely, there needs to be money spent on defence of the nation, Dad?”

“Yes, Son. But most countries’ defence budgets are to protect themselves against external threats and aggressors. We are one of the few countries where we turn our weapons against our own people. It is time we beat our swords into ploughshares, and spears into pruning hooks.” “Huh?”

“We are fighting against ourselves, Son. If only we could reduce our defence expenditure and invest that money in education, healthcare and infrastructure instead – we can really build this nation.”

“But that will be possible only if we can win the peace. Only then can prosperity return to this land – Right, Dad?”