What is Capital Account Convertibility and How it Affects a Country
April 3, 2025
What is Capital Account Convertibility ? Capital Account Convertibility means that the currency of a country can be converted into foreign exchange without any controls or restrictions. In other words, Indians can convert their Rupees into Dollars or Euros and Vice Versa without any restrictions placed on them. The reason why it is called capital…
The global financial system is in the middle of a manufactured boom. Earlier, the economies would boom on their own based on the underlying fundamentals. However, in the present scenario, the boom is 100% manufactured by central bankers that are using every trick in the book and some more to create the perception that the…
The 24/7 Real Time Global Marketplace Makes Firms Live for the Moment The present global marketplace as well as regional and nations marketplaces are uber competitive and in addition, dominated and driven by rapidly changing market conditions where short term thinking triumphs and the scenario is complicated with the incessant buzz of 24/7 news cycles…
The wrong definition of inflation has caused a lot of harm to modern day nations as well as their economies. However, one of the biggest problems created by this misinformation is the price fixing policy. Price fixing is a flawed and failed policy which has caused taxpayers to lose billions of dollars and suffer immense turmoil as many governments all over the world repeatedly tried to implement this policy. Absolutely all implementations have been dismal failures. The reason behind this is fairly simple i.e. the policy has unsound economic fundamentals. This article makes an attempt to discuss this policy in detail:
Since inflation is defined in terms of rising prices, many governments all over the world came around with an ingenious idea. The simply wanted to outlaw inflation! These governments were of the opinion that they can decide the realities of the marketplace from the parliament. Hence, let’s say if for a given year, the government fixed the price of a certain commodity at $100, it would be illegal to sell the goods at any price over $100.
Theoretically this should have ensured that the prices of the products will never rise and therefore the government can claim to have inflation under control. These policies have been widely implemented in many Communist countries. The post World War-2 Soviet Union was believed to have used this price fixing policy widely.
Price fixing may in theory, solve the problem of inflation. However, in reality countries like the Soviet Union experienced runaway inflation when price fixing was being implemented. To the contrary, price fixing created disruption of the normal supply chain. It created black markets, artificial scarcity and corruption. Hence, most companies that implemented price fixing ended up with more problems than they had in the first place.
The reason behind this is fairly simple. Theoretically a person may not buy $100 rice for $102 if price controls are imposed. However, in real life a hungry person will decide to break the $100 price control law and buy the goods at whatever rates they feel are fair. Since these transactions happen in the black market, it is said that price fixing creates a lot of black markets. Also, sellers under the assumption that they may receive a higher price at a later date will try and siphon off maximum produce to the black market creating shortages in the normal market where price control laws are applicable.
The famous example given to illustrate the effect of price fixing pertains to a tank full of water. The intent is to stop the water from overflowing. The normal approach would be to switch off the tap which is supplying water to the tank. Since no more water will accumulate there will be no spilling over. This is the common sense approach and is usually used.
However, price fixing works in a different way. Price fixing does not turn off the tap. Instead under this policy you use an iron cap to cover the tank. You believe that since the cover is made up of iron, it will stop the water from flowing through.
This assumption obviously is faulty. The reason is that once the tank is full and the water still continues to flow it will cause the iron cover to burst and flow out anyway!
Similarly, inflation, at its root is caused by an increase in money supply. As long as the money supply of the country keeps on increasing, price controls will not work. It will be like putting all the money in the pockets of people and then asking them not to spend it. Instead of solving the mere symptoms of inflation, a true solution can only be reached if the problem is considered from its root cause and the cause is disabled.
The marketplace is run by economic laws. Economic laws are based on the best course of action that a person can take under given circumstances. It is impossible to outlaw certain modes of behavior and make them illegal. Doing so will only lead to more government machinery for enforcing the ban and other market disruptions which will not add to the welfare of the economy in any way.
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