With extremely high CPI all over the world, the central banks around the globe have heavily used, what we call, contractionary monetary policy. However there are countable popular and readily used methods such as:
Management of Credit: Regulation of credit rate to increase or decrease the flow of money in market
Change in Fiscal Policy: Increasing income tax can leave citizens with less money to flow around in the market, curbing inflation
Demonetization, or Issue of new currency: This way the market directly has less money (cash, to be precise) to circulate around, atleast for a short to medium term.
However, here I wonder if a new approach can, instead, be used to resolve all this issue without the ruckus that comes with all above listed methods. The Problem: Those who were paying Rs. 25 buy a chocolate 10 years back are paying Rs. 50 for the same today. And the reason for the hike in price by the manufactures is that the cocoa, butter, sugar and milk, all have almost doubled in price in the same duration. But why have the farmers and dairymen doubled the prices? That is because the prices of all the goods in the market have slowly increased over time- the housing, education, FMCGs, and 'the chocolate'. And why have those prices increased? Because today the prices of all goods, including food grains, milk, sugar and the chocolate have increased. That's a mess, a vicious cycle, but created slowly over a long period of time! The Proposed Solution:
So can the government not 'mandate' all the prices in the market to be halved instantly from the following day (just like it did on 8th November 2016 to demonetize currency notes)? This way, the manufacturer of chocolate will be mandated to sell it once again for Rs. 25. But since it will now be cheaper for farmer to buy for his kids, he will be happy to sell his farm produce at the new mandated half the price (consumer price fallen to half). With this, as the prices of food grains and other goods go down, the houses can also be sold at just half the price, because with that reduced revenue, owners can still buy the same amount of goods as they did a day before with double the price.
So is this idea really genius? All it takes is a mutual agreement to reduce price, mandated by an authority as strong as the government? Well, unfortunately the answer in my opinion is 'No'. And the biggest set-back is the savings. The government can, on paper, cut down the prices of physical goods, chop down prices of all stocks to half (like on a bonus share issue), reduce the bond values to half, ask banks to declare all savings value in accounts to reduce to half, etc. But what the government cannot reduce is the hard 'cash at hand'! Let us say you have savings of Rs. 1,00,000 at hand. Now, after the new mandate, the price of all your holdings reduce to half, but not your cash. It still remains Rs. 1,00,000 when the world around has got cheaper, a lot cheaper. So you can now buy things in double quantity of what you could earlier.
That means that the only advantage that you could have got here by reducing inflation - possibly carry less physical cash to the shops to buy stuff - itself becomes the problem!
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