You’ve been taught in school that inflation is a good thing, and that it’s great for the economy, etc. You were told that private and government spending were what caused inflation, and that this was great.
But this doesn’t very well make sense. How would you push up prices if you spend money? If you were to spend a million dollars, how come that makes the overall purchasing power of that currency depreciate? Following this logic, with every transaction, there should be a falling in prices.
This makes absolutely no sense, and here is the explanation that does. Inflation is a direct result of an increase in money supply. In every single case of inflation and hyper-inflation in the world, you constantly see an increase in the money supply, but you don’t always seen an increase in spending.
The reason is simple. It’s like having a soup. The soup represents the currency. If you add water to the soup (more currency), you make more soup, but the soup is now diluted and doesn’t taste as intense.
The same thing with money. If the government prints up more money, it then spends it. Before, when the government isn’t doing anything with it, there is not effect from it. But as soon as that money is injected into the market, the same amount of notes doesn’t disappear. There’s just that much of an increase in the money supply. Due to this increase, there is a natural decrease in the purchasing power of the money, because the economy hasn’t expanded fast enough to accommodate this new money.
The Blogger 
Leave a comment