Can our government print as many as currency notes it wants?
Normally, the exchange rates between currencies reflect the health of their countries' trade balances. Countries that export more than they import will see their currency rise in value, and countries that buy more than they sell will see the value of their currency decrease.
To get into the details currency is actually a bond paper between agreeing parties. When there aren't any currency notes in the market people used to exchange things. Let me say that India got 10 bags of rice and Iran got 10 bottles of petrol. Now when India want petrol and Iran want sheep, both countries exchange rice with petrol. Now, India wants oranges from Australia and it decides that it will give 6 bags of rice for Australia in exchange of oranges. It goes on as far as it wants to import from other countries which it cannot produce. This rate is made at international standard which is defined by “demand and supply ratio”. If Iran can get rice from china also, then the demand reduces and Iran says that it will give only 5 bottles of petrol from next time exchange.
This system works as long as India can provide rice bags to any country. A particular year India couldn't produce rice due to floods or other natural calamities but the need for petrol doesn't vanish just because we don’t have rice any more. What have we to do in this case? We cannot live without the sophistication provided by petrol and hence we go for the debt system. But why should Iran government believe the Indian government? Hence the Indian government went for producing a bond paper which says that the government will give the rice bags when it has. It is a promise on paper to which India is obliged to pay when asked. This bond paper system is applicable to any government. This is the reason that Indian currency has the statement signed by the governor.
How many currency notes can the Indian government produce at any time? It is logical to conclude now as the government can issue only those notes which it can repay. If it produces more notes than it can withstand the promise, the note becomes cheaper value. This is what happened to the Zimbabwe government currency [1]. Recently the Iran government refused to sell petrol to India in rupees because it is hard for them to believe in Indian government promises (no pun intended)[2]. Previously Iran government used to sell 45% in rupees and 55% in Eros.
Is there any standard by which you can buy and sell in the international government? Yes, of course there is a standard unit of currency in international market. All transactions are done in dollars. These are standard bond papers where you can buy anything using these in international market. India buys these dollars first and uses these dollars to buy petrol from east countries.
How is US dollar rate determined? Up to 1971, each US dollar represented a fixed amount of gold. During the Vietnam War, the US had printed and spent more money than their gold reserves allowed. President Nixon had to abandon the gold guarantee. Since then the dollar value is determined by the law of offer and demand on the exchange market. Since the agreements of 1971 and 1973, OPEC oil is exclusively quoted in US dollars. This created a permanent demand for dollars on the international exchange markets. Roughly 85 percent of the oil trade takes place completely outside the US. Dollars are bought on the exchange market and spent in oil producing countries, which spend them in countries around the world. Those countries offer their dollar surplus on the exchange market and the cycle restarts.
Oil commerce always consumes more dollars. Global consumption increases, which raises demand for the dollar and allows the US to increase its production of dollars. Since they are needed outside the US, they have to be made available abroad. There is only one way to get the new notes outside the US: spend them and do free shopping around the world.
This system works like a fairy credit card. Although the US has already much too much debt, suppliers cannot refuse to deliver goods, because they need the dollars for their oil purchases. The essence of the problem is the fact you need a special currency to buy oil. As long as the world needs dollars to buy oil, the US makes abuse of the situation and buys on tick from the rest of the world.
The only solution for this problem would be that oil selling countries accept all currencies on the market. Tehran has already taken into consideration to accept more than one currency and not just the euro.
This is the overall summary of the currency in the international government and how currency flows.
Please leave comments and suggestions towards improvement of the post.
Comments
Post a Comment