Monday, September 30, 2013

The Deficit Financing: The Goal of A Central Bank

First of all, let me explain you about what is the deficit financing as follows: 1) In Macroeconomics: Planned expenditure by a government to put more money into the economy than it takes out by taxation, with the expectation that increase business activity will bring enough additional revenue to cover the shortfall. The term usually refers to a conscious attempt to stimulate the economy by lowering tax rates or increasing government expenditures. Critics of deficit financing regularly denounce it as an example of short-sighted government policy. Advocates argue that it can be used successfully in response to a recession or depression, proposing that the ideal of an annually balanced budget should give way to that of a budget balanced over the span of a business cycle. 2) In Microeconomics: Debt financing to cover excess of expenditure over income Deficit financing, however, may also result from government inefficiency, reflecting widespread tax evasion or wasteful spending rather than the operation of a planned countercyclical policy. The use of deficit financing to maintain total spending or effective demand was an important discovery of the economic depression of 1930. Today it is a major instrument in the bands of government to ensure high levels of economic activity. The definition of deficit financing is likely to vary with the purpose for which such a definition is needed. In under-developed countries deficit financing may be in two forms: a) Difference between overall revenue receipts and expenditure b) Deficit financing may be equal to borrowing from the banking system of the country. Deficit financing is needed when government expenditures are more than government incomes. Then to overcome the gap the government borrows the money from: (1) The local bodies (2) The Reserve Bank (3) The neighbouring countries (4) All the above Deficit financing means increasing the amount of money in circulation at a given time by printing and pumping in more paper currency by the Government of a country. The decision to create a deficit is made to stimulate an economy by increasing consumer purchasing and at the same time to create more jobs. Forms of deficit financing • Seigniorage, the benefit from printing money • Borrowing money from the population or from abroad • Consumption of fiscal reserves • Sale of fixed assets (e.g., land)

 The most important goal of a Central Bank in related with deficit financing is to decrease the value the country currency without using of above forms especially printing money and pumping in more paper currency by the Government of a country but by using the Game Theory. It means that, to avoid normal methods mentioned in classic economic science but using of the complex methods. If a Central Bank decreases the value of the country currency by using the Game theory and without to pump the money, it will have the margin when the central bank will have to really print money where, in this case, the time that the value of money really goes down, there is not any pumping money in markets but the time that the value of money is increasing, the central bank will print the money in accordance with the Margin.  In fact, I am willing to tell you that nowadays due to high speed the change in the world, designing a strategic plan for deficit financing is compulsory. By using of PEST analysis and following up the source of the forces which come from PEST such as Political, Economic, Socio – Cultural and Technology, a Central Bank can deal with these forces in the framework of a strategic plan where it can decrease the value of country currency without printing money. Traditional methodology for this job was the utilizing of the Game theory. But nowadays, the Game theory should be updated by using of new tools and methodologies. These methodologies can be as follows:  Using of System Dynamic to extract all events (propositions) which are related together and also referred to the forces inferred from PEST  Using of Fuzzy Logic Control to find out the best forces extracted from System Dynamic which are compatible with the current rules and regulations Finally, let me tell you that the injection of a stimulus package for economical crisis is something like the injection of insulin for diabetic type (2). It means that, after injection of stimulus package, high fluctuation on factors of the inflation rate, unemployment rate and also growth rate during the period of the exact time should be controlled by using of the some tools which are assigned to classic physics such as Damping and Resonance. In the case of diabetic type (2) is also the same in which after the injection of insulin, the blood sugar should be controlled by using of Damping and Resonance. Both of them need to utilize System Dynamic and Fuzzy Logic Control (FLC) for the PROSPERITY in the management. Now, let me leave the debate about deficit financing and focus on classic physics. In classic physics, the Conservative forces, which are referred to oscillatory and vibratory motions, don’t do any work where we have: ∆K = 0 We as well as know the Harmonic motions come from Hook’s law. The question is, can classic physics also updated? In the other word, can we generate the energy from the conservative forces in which the cost of energy producing will be very cheaper than the cost of energy generating by using of the fossil fuels? Please be informed that 1KW energy saving = 1 KW producing the new energy.