Consequences of Excess of money In;

Household, Corporate sector & Non-Banking Sector

General Effect of excess of money in an economy: Excess of money is the main cause of inflation leading to in the words of Monetarist Economist Milton Friedman, too much money chasing too few goods. We will see graphically how this can lead to a buildup of inflationary pressure in an economy.

Tight control of money and credit is required to maintain price stability

Attempts by the government to use fiscal and monetary policy to fine-tune the rate of growth of aggregate demand are often costly and ineffective. Fiscal policy has a role to play in stabilizing the economy providing that the government is successfully able to control its own borrowing.

The key is for monetary policy to be credible perhaps in the hands of an independent central bank so that peoples expectations of inflation are controlled.

Consequences of Excess of money In Household

IF you get some great multi-millionaires out there, you also get a tone that use and abuse their power and money. Money can create a superficial world, where people become obsessed by status symbols, like cars, (what kind you have, how new it is, or just valuable etc.) houses, possessions really. A lot of people also become blinded by money. They can't appreciate what they have, it's just never enough. People lose their essence of who they are. They just get too caught up in a meaningless game. Also, if you have a psychopathic person with too much money and power you can have a real problem on your hands. The worlds made up of them though. The excess of money in the household sector can disrupt the domestic economy as the flow of money supply will outbranch itself for the lower lever people. In simple words the households with the possession of higher resources will be able to increase more and more of their resource but the poor will get poorer and as there is excess of money in the household so will/can cause time being inflation.

It also depends upon how much of an excess there is, it will lead to inflation. A larger excess can even mean hyperinflation. We have to realize that money can be measured like any other commodity in terms of supply and demand. When you can increase the supply of anything, its value drops. Money holds the same characteristic. Excess in the money supply in household can also lead to a short-run inflationary boom (as that money supply will allow credit to flow more easily to consumers).

Consequences of Excess of money In Corporate sector

Excess cash in corporations typically refers to a surplus of cash resulting from company operations or the proceeds of the sale of a major assetin other words, cash that is the product of normal business activity that is being held until it is used to pay down debt or reinvested in a long-term investment. In addition, there are circumstances in which companies find it advisable to maintain a certain amount of excess cash to meet unusual needs, even if they borrow funds regularly through lines of credit at banks or commercial paper or other forms of debt. A cash cushion is often advisable because a company may not always have access to capital when it needs it. For example, if the company has an opportunity to purchase a large quantity of raw material, a capital asset, or other business opportunity with short notice, it may be difficult to arrange for the additional credit. There are also situations in which revenue falls suddenly as a result of a breakdown in the delivery of the companys product, for example, or problems with a billing system, or a labor dispute. And if the companys earnings are down or its industry is in disfavor, the treasury manager may not be able to renew or expand credit lines or go into the commercial paper or corporate debt market. Finally, the company that has gone to the top of its borrowing lines or is negotiating to expand them will need a cushion of cash to meet liquidity requirements until the credit is secured.

By the excess of money in corporate sector it has played a role in low interest rates and high government spending may have played in helping economies to stabilize during the recent global recession, they now have companies, investors, and policy makers alike on the lookout for inflation to come roaring back. Some economists are already warning of a return to the levels of the 1970s, when inflation in the developed countries of Europe and North America hovered at around 10 percent. Thats not uncommon in Latin America and Asia, where emerging economies have seen double-digit inflation for many years. At first glance, the effects of inflation on a companys ability to create value might seem negligible. After all, as long as managers can pass increased costs on to the customer, they can keep inflation from eroding shareholder value. Most managers believe that to achieve this goal, they need only ensure that earnings grow at the rate of inflation. Yet a closer analysis reveals that to fend off inflations value-destroying effects, earnings must grow much faster than inflationa target that companies typically dont hit, as history shows. In the mid-1970s to the 1980s, for instance, US companies managed to increase their earnings per share at a rate roughly equal to that of inflation, around 10 percent. But to preserve shareholder value, our analysis finds, they would actually have had to increase their earnings growth by around 20 percent. This shortfall was one of the main reasons for poor stock market returns in those years. It can cause in the long run decline in the interest rates.In the long run it will depend on whether the money supply increase is deemed to be permanent or temporary. Unless the change is permanent effects in the long run will not be felt. If the change IS permanent, the following will happen: - As money supply increases, the short run effects described above will mean that output is pushed above its natural level. - However, as output is above its natural level, this means that workers and machines are working overtime (AA curve shifts right) - This increases firms costs as workers demand higher wages, machines need more maintenance etc... - As costs increase, so do prices

- With prices increasing, aggregate demand is pressured downwards (DD curve shifts left) - As prices increase in the long run, the real money supply is also reduced over time (AA curve shifts back left) - As long as the AA and DD curves do not intersect at the equilibrium level of output (natural level) then price changes will push them that way.

Consequences of Excess of money In Non-Banking sector

Financial firms that carry excess reserves have an extra measure of safety in the event of sudden loan losses or cash withdrawals by customers. This may increase the attractiveness of the company that holds excess reserves to investors, especially in times of economic uncertainty. Boosting the level of excess reserves can also improve an entity's credit rating, as measured by ratings agencies like Standard & Poor's. Reserves need to be in liquid forms of capital such as cash in a vault, which does not create income. Banks will therefore try to minimize their excess reserves by lending the maximum allowable amount to borrowers. capital reserves held by a bank or financial institution in excess of what is required by regulators, creditors or internal controls. For commercial banks, excess reserves are measured against standard reserve requirement amounts set by central banking authorities. These required reserve ratios set the minimum liquid deposits (such as cash) that must be in reserve at a bank; more is considered excess.

Under the current banking system the money in your account is not really money at all, it is simply a debt which your bank owes you. Because banks actually hold very little in the way of real money (i.e. cash or central bank reserves) compared to their customer deposits, if everyone came and asked for their money back the bank would run out of money pretty quickly. Even the rumor that other people may be about to take their money out of a particular bank might start a run on that bank. And once a run starts on one bank, customers of other banks start to panic, and try and withdraw their money out their banks. However, by giving people insurance you change their behavior (known in economics as moral hazard). In a world with no deposit insurance if a bank went bust its customers would not receive any money in exchange for their deposits. This would lead them to monitor the banks behavior and decisions much more closely, to ensure that the bank was not taking unnecessary risks which could jeopardize their deposits. Knowing that there was the possibility of losing all or some of the deposits would also lead the customers to demand a much higher rate of interest on their deposits to compensate them for the risk. In Non Banking sector a bond or other debt security issued by a private (that is, non-government) company with an interest rate that varies according to inflation. A corporate inflation-linked security, for example, may pay a fixed coupon plus an additional coupon with the amount adjusted every so often according to some inflation indicator, such as the Consumer Price Index. If these securities are held to maturity, then the investor guarantees that the return will exceed the rate of inflation. Corporate inflation-linked securities exist to provide a low-risk investment vehicle in which the return is guaranteed not to fall below. The excess of money in non-banking sectors can devalue the state banks power over financial enforcement in the country. Which further can cause the give sustaining power to the private financial sectors to regulate the economy or in simple words the economy of the country will be in the control of the private investors. ***********************