PoliteNewb wrote:My view up to this point has been that inflation is what makes candy bars cost 99 cents today when they used to cost a nickel. Is that about right?
Can we discuss causes of inflation? And how it's measured? I saw Frank mention in another post that "inflation is low right now"...if inflation is what I think it is, fuck no inflation isn't low...the increase in the real cost of ordinary goods in my own lifetime is pretty nuts. And if it isn't what I think it is...there's still an explanation needed.
Inflation is generally caused by the imbalance between two related (but seperate) entities in an economy: Money supply, and actual goods.
When people think of "wealth", they generally think in terms of money. "I have a million dollars therefore I am rich".
However, in reality money doesn't actually have intrinsic value on its own. If people stopped believing that money was worth anything then having a million dollars wouldn't make you rich. All it would mean is that you have a giant wad of paper. In fact, in countries with massive inflation (i.e. Weimar Germany in the 1920s), it was more economical to just burn money for heating, rather than to use the money to pay for heating fuel.
In short, money represents a supply of "imaginary" wealth. The supply of this "imaginary" wealth is regulated by the government - which issues money through its Central Bank.
However, even though this wealth is "imaginary", it's hugely important: Because it's much more convenient to trade goods using money. Before money was invented, a farmer wanting to trade rice for a pair of shoes had to find a shoemaker who needed rice right at that moment. Money by contrast allows the farmer to convert rice to money, which he can then convert to a pair of shoes. Without money, trade becomes much more constricted.
Now, how this all relate to inflation?
In an ideal situation, the amount of money in circulation should roughly be equivalent to the amount of actual physical goods & services in the market.
Let's say that you have an economy where the ONLY good in the market are bricks (suspend your disbelief - a brick-only economy is indeed impossible). Let's say a brick is supposed to cost $10 apiece. If there are 100,000 bricks in the market, then there should only be $1,000,000 in the market.
However, the problem is that the supply of goods in the market is not constant. And people have different views on what a brick should be worth. So in reality, you can't say that there are 100,000 bricks in the market for certain. You can only make an
estimate.
So what happens when you issue $1,000,000, but it turns out there are only 10,000 bricks in the market? Well, what generally happens is that instead of keeping the price at $10, the price of the good instead adjusts itself based on the money supply. People generally don't just leave their money sitting around doing nothing.
So in this situation, a brick will probably gradually increase in price until it hits $100 per brick. That's how you go from a $10 brick to a $100 one. Physically, the vlue of the bricks never changed. But because the supply of money changed - the brick's price goes up to make up for it.
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Finally, it's worth noting that inflation is probably inevitable. Because markets are
growing. There are more people now in the United States than there were in 1950. So the supply of physical goods and actual services is now higher than it was before.
To catch up, more money has to be printed. Otherwise there won't be enough money to help facilitate trade and we'll be back to trading rice for shoes. Unfortunately, this causes inflation because of the aforementioned imbalances between money supply and actual goods.
Especially when shit like this happens:
http://www.rollingstone.com/politics/ne ... e-20100405
Wherein banks outright lie about the value of actual goods, and creating th so-called "Bubbles" which result in market crashes. But a "Bubble" is an entirely different subject altogether, and the article describes the sort of shit that wrecks economies much better.
