There has been a very significant age old theory in the economics that Bad money replaces the good money. This hypothesis is the very foundation of financial discipline in the global and national perspective.
Firstly it is pertinent to understand the etymological meaning of good money vis a vis the bad money. Good money is the currency of a nation carrying real value per the state of national economy in the true sense and is duly accounted in the direct taxation mechanism. Bad money is the money carrying inflated value disproportionate with the national economy and is totally beyond the radar of direct taxation mechanism.
The trajectory of printing currencies mechanism and financial discipline of all nations generally interplay and rotates with the macro economics state of the nation as well as the globally adopted economic model being followed by majority of nations. The characterization of good and bad money is not possible at the time of printing of currencies to be percolated in the national banking system. They assume their respective characteristic with the passage of time depending upon their flat valuation post of their being part of banking system and consequent streaming to the market wherein if the said currency carries the real value pari materia of the strength of national economy and is capable of being tracked by direct taxation authorities then it is good money.
But if the new currency is instantly subjected to the market related speculation by the various segments of speculators from stock market to the real estate sector in particular then the said money by assuming baseless inflated valuation starts to rule the good money having logically much more diminished valuation corresponding the bad money and is gradually corned by the bad money.
Next this bad money gradually transforms all the vital financial sectors like construction industry, consumer market, real estate, infrastructures to capital market towards a robust state which they are not in actual. Then the dangerous economic bubble is created which starts to consume more and more good monies in fastest manner from the banking and NBFC system of a nation to meet their financial satiety.
As a result national government is constrained to print more good monies to large extent disproportionate to the national economic strength. Then ironically national government instead of being regulator and guarantee of financial discipline assume the role of feeding the market with huge bad monies. Most national governments fall in this common trap on false notion of robust growth of economy with splurge of adequate liquidity in the market and banking system.
This bad monies like the deadly drugs addicted the domestic market and government with the spree of chasing an absurd target of financial growth bereft of the consciousness regarding the fast meltdown of good money market. Apart from this temporary rosy financial picture drive both the market, industries and government to invest more and more in furtherance of higher GDP being coupled with the national government consistent policy to extend the loose direct taxation mechanism by numerous exemptions and deductions for attracting large investments in the economy coupled with a avowed aim to boost the domestic consumption by channeling more tax free monies to the hands of the common people.
But at a certain point of time this unreal inflated market burst under the yoke of subdued demands and consumptions thus at first leaving the banking liquidity system high and dry with no immediate hope to recoup with the ceaseless depletion of liquidity in the banking system due to burgeoning debt defaults and high boom of borrowings for private consumption and capital investments.
Moreover due to burst of inflated bad money government start to recalibrate it’s monetary policy by hording gold and augment the foreign reserves by frantically trying for export growth to shield the liquidity crunch in the banking system. But at that time national currency starts for continuous auto devaluation against the strong external currencies by loosing it’s intrinsic value.
Moreover due to loose direct taxation policy of the government huge unaccounted bad monies migrated to overseas capital markets and banks strengthening the hands of wicked speculators in the overseas markets to dribble with this weak currency being beyond the control of government to crack down them.
This continuous speculative activities in the overseas markets afflict the domestic economy by two ways. First is to create a continuous pressure on already weak national currency thus blunt the central bank efforts to stop the slippage of currency valuation as well as weakening the domestic bonds valuation by incessant selling spree by the overseas investors. As a result central bank is left with horde of bad monies to combat the liquidity problem and the currency devaluation challenges. It is just like the effort to douse the fire by fire balls.
On the other hand in the global economy too the supremacy of inflated bad monies are established due to common global economic policy being pursued by the majority of nations and large migration of bad monies in global currencies market of multi nations. Then every nation being cornered with the bad monies try to streamline the derailed economy with the gold monetization policy.
But due to faster deflation of value of bad money gold and other precious metal prices start to fall like a pack of cards likewise the other capital assets and investments. As a result the cycle of good money cease to exist in both the domestic and global financial system and deflated bad monies then change it’s characteristic from the credits to perennial debts and national economy start to survive upon by consuming debts not credits with toothless central bank and devastated governance.
Then for coming out from the cycle of debt government has to take many unpalatable financial measures along with the corporate sector like pay cuts, retrenchment, subsidy cuts, import restrictions and many austerity measures.
But due to ceaseless behemoth of bad monies a parallel black market starts to rise which reigns on the national economy through the strength of bad and black monies which not only stall all the hope of financial recovery of a nation but also neutralize all the effective power of governance by devastating not only the financial discipline but also the rule of law too.
This state of grave anarchy will continue till the bad money lost all it’s intrinsic value and good money cycle is reinstated. But this transition period generally takes minimum 10 years or more depending upon the volume of bad monies in circulation both in domestic and in overseas market and timing of their natural complete deflation for being completely ineffective.
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