Inflation

I think the time is now for everyone to gain a full understanding of what inflation actually is since there is so much confusing noise about it these days.  You can't plan for a thing until you understand the thing.

First let me say what inflation and deflation are not.  Inflation is not rising prices and deflation is not falling prices.  These are common symptoms of inflation and deflation respectively but they are an effect, not a cause.

To really understand inflation and deflation, please consider the following:

• Deflation and inflation are events associated with money.
• Money is a human invention which only has meaning or utility when the labor of man produces more than he or his family can personally consume.  Those who live literally hand to mouth have no need for money because they never have in their possession more than they themselves personally need to survive each day.  Money only has utility or meaning in the context of trade and honest trade (which disallows debt as part of the trade deal) requires the participants to produce more than they consume.  I'll refer to this as excess labor.
• Since even the poor today occasionally produce more than they need to immediately consume they need a way to store that excess production in some nonperishable way for a rainy day.  Since you never know what needs you will have and since no man can produce all the goods to fill every need that he will have, money serves as a fungible store of labor.  Once the excess labor of a candlestick maker has been converted to the labor storage invention called money, he can trade his labor in the future with anyone else in the economy and, importantly, even with those who have no need for candlesticks.

           >>>> Fungible storage of labor is the real genius of that human invention called money. <<<<

• Money has no value in and of itself.  Its value is that by mutual agreement it can be traded for consumption items.
• Because of this key point, money only has economic value if there is something to buy.

Imagine a universe with two people in it.  One of them has an apple and one of them has a dollar.  There is only one possible price for the apple and that is exactly one dollar.

• Pricing the apple higher is impossible because the money to pay more does not exist. 
• Pricing the apple lower is pointless because once the apple is purchased there is nothing else to be able to buy with the change.  

Expanding this point to the extreme, all the money in the economy has exactly the amount of purchasing power needed to buy all the goods in the world.  The Purchasing Power of All Money (PPAM) in the economy is exactly equal to the unconsumed goods in the economy.  In the example above, let's say that the guy with the apple goes ahead and eats it.  Since there is no other thing to buy in the economy, the money in that case has exactly zero purchasing power, in other words zero value (which is the intrinsic economic value of money).  This point is important: the money by itself has no value; it only has value when it is possible to trade it for consumables.  If there are no consumables available to buy as in war torn countries, you can have a pile of money and still nothing to eat.

It should be noted that governments can print money and banks can conjure it into existence via fractionally reserved lending.  So the actual number of money units, let's call them dollars, in the economy can increase independently of the amount of goods in the economy.  When the ratio of money units to goods increases, that is inflation.  Note that the scale to the left used PPAM on the left side instead of "$".  That's because increasing the number of dollars in economic circulation does not increase the aggregate Purchasing Power of All Money in the economy.  Thus, when governments print more money they are not printing more purchasing power; the scale in the picture never changes from level no matter how much money is printed.  What they are really doing is transferring some of the purchasing power of the current holders of the money to those who receive the newly minted dollars.  The way this is perceived or noticed by participants in the economy is via rising prices.

To demonstrate this in our imaginary economy, let's add another person and let's say that person brings another dollar with him.  Now there are two dollar bills in the economy instead of one.  Since their combined purchasing power cannot exceed the value of all the goods in the economy, it suddenly takes $2 to buy that apple.  Importantly, the original guy and his dollar can now only buy half an apple whereas he used to be able to buy the whole thing.  That original person made no mistake and did no wrong. Nothing changed about his dollar and nothing changed about the apple but since the purchasing power of all the money in an economy will always exactly equal the value of all the goods, the addition of new money into the economy is inflationary and results in reduced buying power for those holding the money.  Reduced buying power is just another way of saying higher prices.

With all of the above you should now understand that inflation is an increase in the money supply relative to the goods for sale.  The act of living is the act of consumption into nothingness.  Food we eat ends up as human waste.  Clothing and shelters wear out with use.  Cars, watches, sunglasses, all of these things are consumable goods that were built from raw commodities by human labor and all of them return to raw commodities as we consume and then discard them only to break back down into the Earth.  Because of this constant need for consumption, the amount of goods in the world would run out quickly if not for production.  So the equation above PPAM=Goods can be better written as PPAM=Production.

Thus:
Inflation is:

• an increase in the money supply relative to production (more money chasing same goods)

OR

• a decrease in production relative to the money supply (same money chasing less goods)

 and Deflation is:

•  a decrease in the money supply relative to production (less money chasing same goods)

OR

• an increase in production relative to the money supply. (same money chasing more goods)

So,

• if government prints more money for a given production of the economy, it is inflationary. 
• if banks create credit from thin air and people take on the associated debt then (AKA fractional reserve lending) for a given production of the economy, it is inflationary.
• if people pay off debt or default on fractionally reserved loans resulting in the debt portion of the money being reduced then it is deflationary.  Note: there are two components to a fractionally reserved money supply: the monetary base and the credit created on top of that base.  
• The base generally only gets larger over time as government prints up money to pay bills that it is too cowardly to ask for in the form of taxes.  Inflation is, therefore, nothing more than a sneaky taxation scheme.
• But credit has an ebb and flow.  So the credit portion of the money supply, which is typically much larger than the monetary base by 10-30x, does not always increase.  If it did then there would never be any periods of deflation or the potential for a deflationary crash/depression. 
• if an industry, like high tech, is characterized by rapid gains in efficiency and thus in production, it will produce more goods faster than the growth of the money supply.  This is why such industries are inherently deflationary - they always build upon past knowledge and get better over time.  We perceive this as lower prices for electronics and tech over time but the underlying cause is that building on past knowledge and getting better over time is in fact deflationary.
• But those qualities of learning lessons and doing better in the future based on accumulated past knowledge are not unique to high tech.  So why are so many other areas of the economy inflationary as evidenced by higher prices over time?  The answer is simply because the money supply is increasing quite rapidly (see M2 growth below) and very few industries can innovate to increase productive capabilities like high tech has been able to (note: even high tech seems to be hitting a wall these days in terms of ability to grow....).  For any industry that cannot increase production faster than the government can print money, inflation will be the primary trend over time.

 


The con men running our corrupt economy know all of the above.

They absolutely know it and they always have.

Greenspan even wrote about it it very clearly before he sold out to the con game.  In this 1966 essay, Greenspan wrote, "In the absence of the gold standard (ed: in other words, in the presence of fake money AKA fiat currency like the dollar), there is no way to protect savings from confiscation through inflation. There is no safe store of value."

They know that the human condition is inherently deflationary because we keep building on past knowledge and we get to stand on the shoulders of those who came before us.  If we are not seeing this economic truth show up in our personal lives in the form of increased buying power for a better standard of living then we have to wonder where all that value is going.  Look no further than the wealth divide.  The fake money system that has built in inflation benefits the already rich but it does not do so in a vacuum; every action has an equal an opposite reaction.  The increased wealth of the very rich comes only at the expense of the increased poverty for everyone else.  The reason for this wealth transfer is inflation and the engine of inflation is a money supply that is constantly growing.  This cannot happen with honest money and it cannot be otherwise with dishonest money such as the kind we are using now based on fiat currency and fractional reserve lending.