Friday, 11 November 2016

Cash circulation and Economy

   During the initial days of my career, a business analyst gave this small example on how the cash circulation impacts the economy:

A Hotel owner had to give 50 rs to a vegetable shop owner.
The vegetable shop owner had to give 20 rs to a barber.
The barber had to give 30 rs to a...
...... had to give 10 rs to the Hotel.

When cash hoarding happened, it went out of circulation and no one had money with them.

One day a tourist came and gave 100 rs to the Hotel.
The Hotel guy paid 50 rs to the veg shop & deosited 50 rs in bank & the bank gave it to customers as loan.
The veg shop guy paid 10 rs to the barber.
The barber was able to give only 10rs to...
But still the money circulation continued.

Problem happens if the hotel owner or anyone in the middle hides the remaining 50rs from bank or income tax declaration. The money stops circulating & the time comes when one has huge cash and the other have zero.
This problem happens when the high value cash is circulated more in market which is easy to hoard.
If the transactions are more online, then tracking is better. But when offline/cash transactions are more with high value currency, the hoarding starts by which the circulation/liquidity stops which kills the economy.