Monetary Inflation Made Simple
June 17th, 2010 by James | This article was viewed 18,755 times.
Most of us perceive inflation in many different ways. Commerce graduates are taught in universities to look at the Consumer Price Index (CPI) to determine the inflation or deflation of price for average goods. Normal citizens like us would normally gauge inflation on a daily basis through buying daily needs. However, the plain simple truth is that all these methods are delusional, incorrect and biased.
I once got into a heated debate about inflation with a person who knows zero about inflation and was telling me this, “I got a better computer system with my $1000 today than two years ago, now that’s fighting inflation”. If this is how you interpret inflation, reading this article will definitely be a treat to you.
Paper Money
Let’s talk a bit on our paper money since it is important to get to know our little paper friends if we really want to understand inflation.
I believe that at least 60% of the world’s populations are still presently uninformed that the paper currency they are holding now is not real money. Our paper money (credit in electronic form) is a Legal Tender*, meaning they are only worth something as long as the government says so.
Also, as we all know, counterfeiting money is a crime and you go to jail for printing money. However, the process of creating more paper money is nothing but a legal counterfeiting of money. To illustrate on that, new paper money is printed by a printing machine and new credit are just numbers added into the computer. This can be done legally by a Central Bank, and most countries have a Central Bank.
Now do you realize how disastrous this would mean to you and me when somebody can print money out of thin air? To answer this question, let’s find out how new money gets their share of “value”. A metaphor for this would be the number of children in a family. If you are the only child in the family, I’m sure you receive all the attention and are “worth” more. However if you’re from an old school Asian family that has ten or more children, you receive less attention and is “worth” less.
I know, bad example, but as you can see, new money seeps value from our current money and debase all the currency as a whole. This results in wealth being transferred away from our savings and investments to the people receiving the newly printed money.
My Definition of Inflation
So my simple definition of inflation would be nothing but the expansion of monetary supply that causes the debasement of our money and thus reducing our overall purchasing power.
The reason I said that relying on the Consumer Price Index (CPI) is delusional and incorrect is because the main problem is not the increased price of goods. The main problem is the increase in money supply without the increase in economy output. This causes inflation and companies have to jack up their prices to survive the inflation.
The mainstream media blames price inflation on greedy companies, which is untrue for most companies. The media is the perfect propaganda tool being used by the government to spread their “fairy tales” to vulnerable and uninformed people like us. I strongly suggest you to think twice before believing anything on the TV or radio.
Legal Tender – Something offered as a payment legalized by the government
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13 Responses to “Monetary Inflation Made Simple”
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June 20th, 2010 at 6:33 am
Hi guys,
Great Blog!!! Inflation is something I rarely talk about, because it’s complicated and I really don’t understand it. Thanks for sharing.
Kind regards,
Sam
X
June 20th, 2010 at 7:52 am
Wow.. that person definitely doesn’t know anything about inflation, that’s for sure! It’s a simple Supply and Demand… that would explain why the computer situation. I liked your explanation James, you seem really well informed! :)
June 20th, 2010 at 8:20 pm
“The main problem is the increase in money supply without the increase in economy output. This causes inflation and companies have to jack up their prices to survive the inflation.”
which is exactly why we evaluate inflation based on CPI. That’s one of the most convenient tool to measure inflation despite the slight inaccuracy. But hey, this is economics that we are talking about and there is no such thing as 100% accuracy.
June 23rd, 2010 at 2:32 am
Monetary Policy has always intrigued me. It is interesting how governments can basically make “wealth” out of thin air. Throw in global economic climates and you have a really interesting topic.
July 7th, 2010 at 2:40 am
Inflation really kills the livelihood of our countrymen. How could those high officials approved such bill.
July 8th, 2010 at 5:29 am
The main problem is the increase in money supply without the increase in economy output. This causes inflation and companies have to jack up their prices to survive the inflation.”
which is exactly why we evaluate inflation based on CPI. That’s one of the most convenient tool to measure inflation despite the slight inaccuracy. But hey, this is economics that we are talking about and there is no such thing as 100% accuracy.
July 10th, 2010 at 10:45 am
@lollass Yes companies will Jack their prices up to survive, but at the same time, doesn’t the salaries of the people who work for the companies also increase? I would think that in the long run even with inflation, that the economy would self adjust if let alone?
Till then,
Jean
July 15th, 2010 at 12:02 am
Inflation is something I rarely talk about, because it’s complicated and I really don’t understand it. ;)
August 4th, 2010 at 5:28 am
Hiking in Inflation always make an issue. One of the best blog post I read in recent past. This post have great content. I can stand up and say superb! There is sufficient reason why you got more than thousand visitors to your article.
August 13th, 2010 at 6:16 am
@sisme, then it’s the perfect time to try and learn about it!
Till then,
Jean
August 21st, 2010 at 2:41 am
Increase in inflation really the discussing topic nowadays.
Everyone wants to get rid from it and finding new ways daily.
December 22nd, 2010 at 5:59 am
Inflation really kills the livelihood of our countrymen. How could those high officials approved such bill.