Please Change Cash Here

Towards the end of 2016, India shocked their population by announcing the sudden withdrawal a majority of currency in circulation. On the 14th November, India announced they were scrapping their 500 and 1000 rupee notes – a move affecting +85% of all rupees in circulation.

This blog post will explain that the root for the move and will analyse whether the long run benefits of the moves will achieve their publicly proclaimed benefits.

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Arguments Against Government Surpluses

A government surplus represents the removal of funds from the private economy with uncompensated public sector productive value creation. It is a policy recommended by those that champion “austerity economics” – however logically, this pattern is liable for encouraging systemic weaknesses and therefore future economic crisis.

It should be noted that although this blog post critiques austerity government policies, it does not argue for uncontrolled government spending. Rather, the ultimate implication is that “a” level of government deficit is not a bad thing because it helps enables economic growth (or at least does not actively damage the ability to achieve for economic growth). But if this is not politically feasible, at least target balanced government books – because at least this is not actively harming the ability for economic growth and encouraging economic crisis.

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The Real Problem With Deflation

Deflation is negative inflation: a general decrease in the average price level and an increase in the purchasing power of money. Every school of economics considers deflation negative for economies. However the standard explanation of why deflation is terrible for economies is incorrect. The correct explanation is understanding the impact of deflation on the real rate of interest, and thus the ability for private firms and individuals to manage debt repayments.

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