Deficit Financing and Inflation

Deficit Financing and Inflation The dangers of creating money are sufficiently well known. Such a course means the depreciation of the existing currency and consequent inflation c prices. If carried beyond certain limits, it may completely undermine pu

Deficit Financing and Inflation

The dangers of creating money are sufficiently well known. Such a course means the depreciation of the existing currency and consequent inflation c prices. If carried beyond certain limits, it may completely undermine public confidence in the currency with catastrophic results. Deficit financing can therefore, be advocated only if there is an assertion of stable supplies of the necessary goods of consumption. The injection of amplified power of purchasing into the organization is appropriate to show the way to amplified demand for basic commodities and if their supply cannot be expanded quickly, their prices rise and improve the cost of living.

It will thus be apparent that the capacity for deficit financing is closely wired up with the strategy of controls. If the supply as well as allocation of food grains and additional vital goods may possibly be so planned as to meet up the smallest necessities of the society, the risk of deficit financing would be to that degree diminished. The force of large money income would then drop on other goods which are more of luxury type and matter not as much of from the view point of the cost of living of the great mass of the society. Unless, therefore, there is a solid and lucid policy in regards to controls, not only will the range for deficit financing be restricted but there will be a everlasting risk of even comparatively small budgetary deficit producing inflationary pressures. The increased purchasing power would immediately push up demand for essential commodities especially if the level of consumption happens to be very low, as is the case in India.

The economic effects of deficit spending also depend upon the contemporaneous conditions in the private sector of the economy. If the Government launches upon a programme of deficit spending at a time when private investment is slack, the inflationary potential is definitely less, for deficit spending will in the first instance help to steady the level of the national income. But if the main purpose of deficit spending is to initiate long-term development and to supplement private investment,   the inflationary potential will be heightened, for newly-created money is indeed high powered money; sooner or later it is liable to be used as the basis of a multiple credit creation.

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