Money Cycle

This is a rather extended article but I feel it is necessary to write in details since this phenomenon of money cycle is not properly explained in any book on economics. Please go through it patiently. Thanks!!

Study of this money cycle is the base of all economics. This comes under Natural economics. Presently what we experience is mostly artificial economics. Artificial economics is developed by vested interests in the market to justify wrong moves in the money cycle to protect their interest and to diverse money to their side. All strategies recommended in this branch of economics are usually against the needs of natural money cycle. All regulatory orders issued by various bodies such as Reserve Bank and Finance Ministry are coming under artificial economics.

Adam Smith repeatedly attacks in his book, “The Wealth of Nations”, groups of politically aligned individuals who attempt to use their collective influence to manipulate a government into doing their bidding. In Smiths day, these were referred to as “factions’; but are now more commonly called “special interests”, a term which can comprise international bankers, corporate conglomerations such as MNCs, outright oligopolies, monopolies, trade unions and other groups. All this interference is called artificial economics!

Two theories are suggested first says that depression or recession is caused when this circular motion of money is slowed down or stopped due to hindrance or resistance from some factors in the cycle. To know more about this theory we will find out what are the numbers of factors lying in the passage of the money when it is circulating. By this hypothesis we can clearly understand what is causing recession. Each factor involved if taken care of by proper planning we can be sure that there will be no recession in the economy.

Second theory suggests that the velocity of the motion of money is directly related to the prosperity of the society. That means higher the speed of motion of money more prosperity. That means to bring prosperity we should see that the velocity of motion of the cycle of money is maintained at the highest possible rate.

To understand the money cycle we should know about other cycles existing in this cosmos. “Carbon cycle”, “Sulphur cycle”, “Nitrogen cycle” and “Vapour cycle” are known in the science of environment. We keep them in proper condition to keep the environment in healthy condition. Similarly, in science of economics we have to understand the cycle of money. To do that one has to find out how the money in your hand moves in the market.

Let us take a simple example to understand the concept of this cycle, you (last user) are going to the market to purchase your grocery, you buy rice and pay the money (first transaction).

The grocer puts the money in his chest until he pays to the other dealer to buy his other purchases. Money in the chest of the shop keeper is the second transaction. Trader has paid the money to other purchase or he deposits the money in the bank (third transaction).

Money has gone to the bank and is lying in the treasury of the bank or the chest of the other dealer until it is further used (fourth transaction).

Money is paid to the other dealer or manufacturer by the dealer or the Bank is fifth transaction).

Manufacturer or the other dealer has made payment to some body by way of salary or any such spending to their employee or contractor that is sixth transaction.

Now the money has come to the “last user” for again spending. Or we can say that the money has completed one cycle.

That means one cycle of money is starting from one last user to the next last user that is one cycle. In between it moves to other hands and each one hand is considered as a separate transaction.

For the sake of example we have taken a very simple cycle of transactions. In actual we find that money moves a lot before comes back to the last user. Money in your hand (last user) is the starting point and coming back to other or same last user is completion of the cycle. One simpler example says, a house wife got her salary and then she made payment to her housemaid her wages. In this cycle money has moved from one last user to other last user without passing through any other series of transactions. This is considered the simplest example of money cycle.

We have seen that there are two types of transaction in the cycle. In some transactions, money remains in either a chest or treasury or pocket lying unused. And other transaction shows that money is changing hands. The first transaction when money is lying idle is called static transaction and second type in which money is changing hands is called dynamic transaction. What cycle we are considering is called basic cycle. There are compound cycles and they are made up of many basic cycles. To study various ills of economics one must understand these cycles and by tracing them one can find the remedy.

Recession is caused when money is in static condition (remaining unused) for some or the other reason. If money is continuously changing hands then recession is avoided. We will now study what causes these static transactions; and how to remedy it.

Study of economics is study of this cycle on money. Some people take only a segment of this or a complex (more than compound) cycle and try to explain causes for recession and there they make mistake. To find all causes for any recession of depression we must take all the factors involved in a cycle.

Effects of Static transactions:

When money remains idle it is out of circulation and that causes currency crunch (shortage) in the market. If a large amount is idle as every body in the society may keep some money at home idle, thinking that he is doing saving then that idle saving can create an effect similar to recession. We are supposed to do savings but keeping home your money is called idle saving and when you save it by keeping in a savings account in a Bank or credit society, since the money is available to the market it is called active saving. So savings in a bank helps the market and also helps avoid recession.

Second example shall see a large scale movement of money. A factory makes payment to the workers and that makes first transaction. Now the money is with the workers for further use. Factory has made big profit and that profit factory does not give to the workers but reinvest in share bazaar. This transaction uses money for speculative activities. All speculative transactions are prone to develop depression like effects when done beyond safe limits. These transactions are called speculative transactions.

Many economists suggest that all extra profits must go to the basic three elements of any industry or business. These basic elements are workers, shareholders and the factory. If extra (after tax deduction) profit is distributed to these three elements in the right proportion then there will never be any possibility of recession in the market for simple reason that this money goes to the last user. This improves purchasing power of the last user (public). As a result market benefits as this money is spent by the last user for purchasing essential and also non-essential goods. This improves the velocity of money cycle motion leading to prosperity.

Effect of speculative transactions

This implies that profits of business should never go to the speculative activity such as share bazaar. In other words share bazaar should always remain as an investment market and not a speculative market or a gambling den!

Today we see that there are restrictions of maximum bonus and also on giving maximum dividend and on issue of bonus shares. Why these restrictions are made is not clear. Some say that these restrictions are a callous conspiracy to rob the two basic elements of any industry, workers and share holders, both are unprotected sectors! If these restrictions are removed and it is made compulsory that the profits must go to these two elements then there will never be any possibility of recession in economy of any country. Equal distribution of the profits is expected. Today very little share of profit is distributed to these elements and balance is pocketed by the board of directors in very many ways. Today we see some people been very rich such as Ambanis, Mallay etc. They are rich because they have pocketed that profit using the provisions of the law of restricting bonus and bonus issues and dividend. Very often these profits are so enormous that they have to reinvest it and there they find speculative share bazaar as a suitable means.

In recent case we saw that speculative activity was so good that business people diverted the profits from the main business to sharebazar and when the market crashed they were left with not enough reserves to do their regular business and these situations are in principle responsible for local recession. I have been blaming Manmohan Singh and his ally Chidambaram for present situation because they encouraged speculative activities in the share market and the rise in it was wrongly noted as growth; forcing people to put their hard earned savings in the speculative market and finally as market crashed they ran away without taking the responsibility of what they caused. No country develops by pure speculation. It is accepted by many experienced financiers that speculative portion in the total financial activity should not exceed 10 % while due to wrong manipulations of these people it went as high as 40 %.

One Jain businessman told me a mythological story that our Lord built 18 Universes and still remained with extra ten fingers. They were not your or my fingers; they were fingers of the Lord and further reference says that one finger is equal to 18 universes. That means Lord gambled by starting Universes and it was only 9% spent on the speculation! This shows that one can indulge in speculative investments only up to 9 to 10 % and not more!

Here we see that some agency such as a Finance Ministry or Reserve Bank or some regulatory board are making regulations by which the full profit is not given to the elements but reserved immorally at some other place. These Regulatory Boards are quite often responsible for Depression or Recession like results. It has been found after studying four recent recessions (namely 1837, 1867, 1933 and 2007) that these Regulatory Boards are responsible for all the recessions and in addition to that other factors have also effected these recessions. We shall see those other factors after some time. These regulatory bodies are not bound to give explanation while making these restrictions. Very often it is found that there is ambiguity in whatever explanation if at all given is found and that point to the suspicion that the regulatory bodies are taking disadvantage of their authority and do regulations for the benefit of vested interests of the high and influential ones.

The conspiracy is set by the ruler class and the business class, hand in gloves. Our judiciary is a slave of the laws made and it cannot do anything out of the provisions of the law and that is exactly what helps these callous people. We must demand that these restrictions are removed so that equitable distribution of profits will be mandatory for all business activities and that is one way we save our economy from going out of control.

Profit calculation is one big affair; I was told by one experienced chartered accountant that they can show a profiting company in red and a loosing one in profit. The jugglery of Chartered Accountants is well known to all. Of course, we cannot say that all Chartered Accountant firms are indulging in that but most do and that is one of the hurdles in the path to improving purchasing power of the people.

We shall not go into the detailed study of how these restrictions are put to use to rob basic elements of the industry. Many, question that the Directors themselves are also sometimes shareholders and so, why should they do it? The answer to this is very simple. By proportion of the shareholding what they could get is very much less in proportion to what they can get by this manipulation!

One argument suggests that so far only three elements were considered but, as the multinationals have developed, one more element has come up for appreciation and that is “management”. They say Management is different from all the previously noted elements namely, factory, workers and shareholders. Management is the Director Board and all the decision making high power executives. They claim that the effectiveness of this fourth element, which is presently included as a part of element “Factory”, decides the ultimate success of the enterprise. They also suggest that if this fourth element is recognized as a separate element from the element “factory” and so profit divided in four elements equally and not in just three. Then that shall help improve the working of all enterprises considerably. This will cause management people get very large bonus but that is good for the market as that money will go in purchase of expensive items giving boost for that market.

All recorded recessions or financial depressions are directly related with speculative activity in the market. All financial depressions are connected with Jew businessmen. America is been the source of all these recessions. According to the records first crisis was in 1837. That was related to the transition of gold standards but other two are related to the greedy speculative and predatory lending habits amongst the Jew Bankers. Almost all Bankers have been Jews and it is recorded that these people have a deep attraction for over speculations in the market. As the linking between nations improved the communicability of such ailments became more sensitive and as a result financial crisis of US could spread to other nations who are trade-wise connected to US.

We see that to keep the money cycle in motion following points must be noted and when they are taken care of we shall never have Recession or Depression. Americans believe that Recession is small; when it deepens, it is called Depression and still bigger is called Crash!

The basic principle is that small man who is the root of all economics must have good income so that his/her purchasing power is sustained. To do that profits of the company, they work, must be completely distributed without any restrictions and dividend and bonus issues must be regularly issued to share holders without any limits.

We see some companies expand their factory and such other activities and for that they use funds out of the profits but do not issue bonus shares. This way they actually cheat the shareholders with the help of various provisions of regulations made by the government. All this points to the activities of artificial economics; apparently every thing appears to be legitimate and it is all legitimate but creates obstacles in the smooth movement of money cycle. When profits are spent to expand business; first that must be declared as capital and in accordance appropriate bonus issues must be made. Today for all these things the directors have to apply to the appropriate authorities and there the corruption and all that create other obstacles. Laws must be so made that a company can issue bonus shares and then invest that money in the expansion. And all this need not have any permission.

Companies do not want to issue bonus shares because they want to cheat the shareholders for the dividend they will have to pay! Desire to cheat is the basic purpose behind all the artificial economic laws. If companies or governments do not want to cheat people they can work by the rules of natural economics. For example, erstwhile L&T Company practiced these laws of natural economics and we know how everybody was happy! That Company was growing at more than 10% per annum even without all the new concepts we talk of today. That means, within the limits of natural economics one can grow faster and does not need any artificial help!

In the stock exchange greediness of high and powerful is controlled by the finance regulatory agency by bringing limits on both high and low values of any equity. We have limit on low value but no limit on high value and that causes excessive speculation leading to Crash. I was told by one conservative share broker that they wanted limit on high value but since we internationalized our share bazaar it was not possible. Stock Exchange should work as an investment market and should not be converted into a gambling Den. We must not take tips from Americans. We have suffered a lot by taking advice of American gamblers, mistaking them for economists!

Subsidized loans are offered to housing and cars through nationalized Banks that must be stopped. If government wants to oblige these sectors they can give subsidy at the cost of government and not at the cost of depositors of the Bank. Bank rates must be same irrespective of what loan it is. The lower rate of interest is arranged by contribution from the government exchequer. That means Government shall pay the difference to the Banks.

Banks are to make profit and not designed to do charity for the convenience of some minister’s whim. Any such subsidy should be challenged. This practise of exploiting Banks’ awkward position to make populace schemes must be challenged by the depositors and Bank management together. This practice of using Nationalized Banks as Guinea pigs for economic experiments must be stopped.

Banks are forced to generate excessive reserve funds; for that when I asked one senior officer told me that when politicians are favoured by their government these people are issued huge loans from big Banks such as State Bank, HDFC, ICICI and IDBI and that loan is not expected to be paid off and so this reserve fund is used to right off that liability! He further told me that such reserve funds are created at the cost of small savings and fix savings by reducing rate of interest there. This is the most legitimate method to rob small man of his earning; he said. Presently State Bank is continuously reducing FD rates as big loans to some politicians are going to be made after the election is over. Worst part is that Governors and CEO of these Banks are joining in the racket! How can we trust these governors and CEOs?

Bottom line is to improve our economy we have to do following things:

No limit on bonus to workers

No limit on dividend to shareholders

For every expansion out of profit money bonus issue must be made. And there be no limit on how many bonus issues for how many existing shares should be put.

Company gradation (A, B, C) should be based on how many bonus issues are given to shareholders.

If these corrections are made to our economy; it will never suffer from recession in future.

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