@Ndungi
You are very right. Thank you for understanding everything in my earlier posts. Now about the doctor who only affords the same as he could afford ten years ago. Remember, the doctor's wealth grows at a certain rate,.. the combined wealth of Kenyans also grows at a certain rate (real wealth including jua kali, businesses, private hospitals etc that rarely get into official figures) and the money supply grows at a certain rate.
Let us assume the doctor's 'medical wealth' grows at a rate equal to the total economy's wealth growth (number of people creating wealth is growing and their individual wealth is also growing). When money supply tries to cover this growth in total wealth, the prices rise in a way that the doctor finds himself affording the same bread he could 10 years ago. The increased money supply ensures that the demand for the bread (number of people willing and able to buy it) has gone up.
Thus, for the doctor to afford more bread, his total wealth growth has to be greater than the economy's natural growth. He has to either work harder or work smarter to ensure his wealth surges ahead of the general economy.
Your issue with banks is based on the credit system. Is it possible to get money, purchase some wealth-creating resources (eg land, workers, some trucks), create some wealth, convert it back into some money to pay off the money borrowed and reserve the other wealth as yours? Yes it is, that is a loan. Banks get this money easily when we deposit it in our accounts... the rest as they say is history
Davis
On Mon, 2010-05-24 at 14:15 +0000, Ndungi Kyalo wrote:
@Phares,
Please do expound. Am curious to know how it spurs investment too ..
@Davis,
Remember that money is just a form of transfer of wealth... from my earlier post. An economy has to have a certain level of money in circulation for us to conveniently convert our wealths. Since our wealths grow (eg a doctor becomes better with experience hence his total 'medical wealth' grows from year to year) (also, the number of doctors is increasing) then we constantly need to keep raising the levels of money - again to ensure convenient wealth conversions.
True dat.
However, the value (wealth) locked in one particular item in the economy, eg a loaf of bread remains constant. Thus, when you raise the money in circulation and try to price the loaf of bread, its price shifts. If the increase in money circulated is higher than the loaves of bread increased, then the price might rise naturally (inflation) whilst the reverse might also be true (deflation).
Did you notice something ? Inspite of the doctor's amassed `medical wealth` he can only afford, roughly, the same loaves of bread he could afford 10 years ago when he wasnt as wealthy as he apparently is, thanks to inflation. (In fact, its a slightly worse in Kenya and the 3rd world, lakini hayo na siku nyingine.) Inflation is then making a mockery of the doctors' sustained hard work : It is simply assuring the doctor that he will never be able to afford (an arbitrary) 100,000 loaves of bread, irregardless of how much he earns and saves. Because the harder he works, the more the money will be pumped into circulation, and at the same rate the price of bread will rise. Joe's analogy of a cow today `becoming a goat` tomorrow then becomes true. Isnt that what happens to savings ?
The exception though, is the person who happens to make an extremely large amount of money in a very short time. With this one, inflation doesnt catch up. I wonder by what means is it possible to make such a large amount of money in a short time ?
My 2 cents ( will be 1.25 tomorrow ;-).
--
Davis Waithaka Maina
Business Development Manager
Systems Kenya Solutions
4th Fl. KCB Building
Enterprise Rd., Nairobi
www.systemskenya.com
+254 721 305 374
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