This podcast breaks down the process of how money is created in India, explaining concepts without using jargon. It delves into topics such as money creation by central and commercial banks, the impact of inflation, the role of the Reserve Bank of India, the stock market, and the wealth effect.
Commercial banks play a major role in creating money in the economy through lending and borrowing activities.
The stock market and housing market contribute to the expansion of wealth and money supply in the economy through the multiplier effect.
The wealth effect, driven by asset appreciation and direct government subsidies, can lead to inflation in the economy.
Deep dives
Money Creation through Central Bank and Banks
The podcast episode discusses the creation of money in the economy, starting with simple examples of how the central bank creates money and its impact on inflation. It explains that most of the money in the economy is created by commercial banks through lending and borrowing. The role of interest rates, reserve ratios, and incentives for money creation by banks is also explored. The episode highlights that the stock market and increasing stock prices contribute to the money supply by creating a multiplying effect. It emphasizes the concept of velocity of money and how interest rates contribute to the expansion of money supply in the system.
The Dual Role of Banks and Creation of Money
The episode delves into the dual role banks play in creating money. Not only do banks create money by lending, but they also create money through the charging of interest rates on loans. The concept of spread and net interest margin is explained, highlighting that banks earn profits by lending at a higher interest rate than they borrow. This podcast episode emphasizes that banks effectively create money within the economy and how lending and borrowing activities contribute to the growth of the money supply.
Multiplier Effect: Stock Market and Housing Market
The podcast discusses the multiplier effect in the stock market and housing market. It explains how a company's stock price can increase through market demand and investor perception, resulting in a higher market capitalization than the earnings generated by the company. This multiplier effect leads to the growth of the stock market value beyond the actual earnings. Similarly, the value of housing stock can also surpass GDP due to market dynamics. The episode highlights that both the stock market and housing market contribute to the expansion of wealth and money supply in the economy through the multiplier effect.
Creation of Money by Banks
The podcast discusses how banks play a major role in creating money in the economy. While the Reserve Bank of India (RBI) prints money, a larger portion of money creation is enabled by banks lending out capital and leveraging their assets. Banks can lend up to seven times the capital they possess due to capital adequacy ratios. This means that for every additional 100 rupees they lend, they are required to have only 15 rupees in capital. If the RBI were to buy equity in banks and print money, this money could be multiplied seven times by the system. This highlights the significant role that banks play in money multiplication and potentially creating inflation in the economy.
Wealth Effect and Inflation
The podcast discusses the concept of the wealth effect and its impact on inflation. The wealth effect arises from people perceiving themselves as wealthier due to asset appreciation, such as stocks, bonds, or real estate. This perception leads individuals to spend more, creating inflationary pressures. Optics and the wealth effect are integral in influencing spending behavior and perceptions of wealth. Additionally, money creation through direct government subsidies or welfare schemes can lead to inflation as it puts more money in the hands of individuals, driving up prices. The podcast emphasizes that governments can tackle inflation by minimizing direct subsidies and focusing on productive investments like infrastructure rather than giving individuals money to spend freely.
Ever wondered about the whole money thing – how it's made, where it comes from? Well, in this podcast episode, we're breaking it all down, and without using any jargons.
We also promise that this podcast will not remind you about an economics class. Because, it's not a lecture on economic theories. Nope. It's more like your friend explaining things in a way that just clicks. You'll walk away with a bunch of useful insights to help understand the concept of money a little better.
Make sense of those tricky concepts you read about in newspapers or on business channels. You know, the stuff that usually leaves you feeling a bit puzzled.
Write to us at podcast@capitalmind.in if you have feedback or ideas. We read and reply to all emails.
References
00:00 Introduction 01:36 How is money created? How does it grow? 12:41 Money printed is not the same as money spent. 32:16 How do banks create money by lending? 40:59 How does money flow between banks and RBI? 43:53 How do banks make money? 48:40 More ways to create money 53:59 Wealth effect: People often assess their wealth without accounting for the impact of taxes. 59:41 The central bank isn't the one creating inflation. It's the people. 1:02:53 Economies create wealth by moving up the value chain
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