Economic Crisis : To hold cash or to boost consumption : A big question mark while playing safe. Recently in this pandemic environment, I was looking at various articles, statements, Videos and blogs by several profound COOs, CEOs and CFOs and find that more often than not the suggestion and recommendation is that in current time Economy will take time to revive and only mantra to remain in race is to preserve Cash. Don’t spend and hold down to your cash which will make you survive.
I was wondering, with my little knowledge of economics, the whole economic world works on consumption. If consumer doesn’t consume the economy stand still. It seemed to me like chicken and egg story as everyone would like to hold cash and wait to revive the economy but don’t know how, as without money exchanging hands how the economy can revive ?
Let me share an old story again, you may have heard or read it several time, but worth quoting it again as it seems very apt to me :
It is the month of August; a resort town sits next to the shores of a lake. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit. Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 dollar bill on the reception counter, and goes to inspect the rooms upstairs in order to pick one. The hotel proprietor takes the 100 dollar bill and runs to pay his debt to the butcher. The Butcher takes the 100 dollar bill and runs to pay his debt to the pig raiser. The pig raiser takes the 100 dollar bill and runs to pay his debt to the supplier of his feed and fuel. The supplier of feed and fuel takes the 100 dollar bill and runs to pay his debt to the town’s prostitute that, in these hard times, gave her “services” on credit. The hooker runs to the hotel, and pays off her debt with the 100 dollar bill to the hotel proprietor to pay for the rooms that she rented when she brought her clients there. The hotel proprietor then lays the 100 dollar bill back on the counter so that the rich tourist will not suspect anything. At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 dollar bill, after saying he did not like any of the rooms, and leaves town.
No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.
The basic idea to note and understand for all of us, is that one 100 dollar bill exchanged the hands 07 times and came back to original hands and simply changing the hands revived the economy of whole town. It seems today we are forgetting the fundamentals of economics and trying to hold the cash flow which can never thrive any economy. The most important and must to do, fundamental requirement for any economy to revive or thrive is to improve consumption behaviour. If everyone start holding money, the money stop exchanging hands and economy performs way below that it can in normal or even in bad circumstances. In corporate world people feel that paying the salary to direct employee is the only means of protecting employment, however we forget to consider that every expenses we cut down whether in corporate or personal world is cutting down the employment somewhere in economy. One side we cannot afford to keep paying without revenue on the other side we cannot stop majority of cash flow and expect economy to survive without boost in consumption.
Especially, if we look at the specific reference to Indian economy, In our GDP data for a period from 2015 to 2019, it has only sub-20% export proportion which means more than 80% of our GDP constitute of domestic consumption. Which means even if the global economy does bad or worse, we can still look to revive our economy through boosting our domestic sentiments and pushing up the consumption in domestic economy and to do so, most important thing will be that Rupee keep exchanging hands in India. We are only looking at basic law of economics. Based on past great recessions and depressions, it was learned that inflation is comparatively much better than recession, because in inflation although the value of money get diminish, still you have money in hand to buy your bread and essent,ials however in depressed economy people lose all their employment and don’t have penny in hands to even buy a bread.
Hence to summarize, Stimulation to economy and market is not only government job, every one need to play responsibly and reinvest the reserves in market caculatibly. In my opinion we should not be stopping the flow of money and curtailing down all the expenditure so much that Rupee stop exchanging hands. The money lying in bank cannot serve us for longer, we need to use it to make more money out of it. That is the only way to survive longer. If everyone will advocates to hold the cash and no one will spend it, the revival will never happen or will take much longer duration than required and expected. Hence we must take a middle view and keep a balance between cash flow and movement of money as more it will change the hands more it will come back and improve the buying power of customer and thereby the businesses will cherish and so the economy will and so on with positive sentiments.