Monetary Inflation Made SimpleJune 17th, 2010 by James | This article was viewed 22,820 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.
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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