posted on Sep, 18 2009 @ 04:44 PM
Continued from above.
What is inflation in terms of the monetary system?
Inflation - increase in the amount of money and credit in relation to the supply of goods and services.
I believe that theory is pretty straight forward. Many opinions and definitions exist in description of inflation. Most are rather technical and hard
to follow. Inflation, in my own words, is excess of money, in comparison to limited goods. In the above explanation you learned how money is created.
Thus, you can easily see how inflation comes into play. Banks can basically create 9 times the amount of any deposit out of thin air. It doesn't take
a genius to see that the abundance of money, and the decline in it's value, is on the rise. In 2007, it would take $21.60 USD to equal $1.00 USD in
1913. Interestingly enough, the Federal Reserve was established in 1913. You do the math.
Two causes of inflation are the most generally accepted. They are Demand-Pull and Cost-Push.
Demand-Pull Inflation -this theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than
supply, prices will increase. This usually occurs in growing economies.
Cost-Push Inflation - When companies' costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things
such as wages, taxes, or increased costs of imports.
In conclusion, it is important to note that inflation is extremely controversial and debated. Many theories and opinions exist. Grasping the concept
is rather easy, but a true understanding will take some further reading. Google is your friend.
P.S. Seriously, google is your friend. BING, YAHOO,AOL, ASK. They all suck. Also note wikipedia for being worth it's weight.
Where does the application of interest fit into all of this?
Interest - The fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal.
Ah, and finally we reach the truly mind blowing application of interest. To explain interest, we have to back up to money creation. More importantly
where money originates from, before it hits the hands of the public. The federal reserve is the birth place of all money in circulation today. The
whole story goes a little something like this:
The govt. decides it needs new money to go into circulation. It calls up the fed and asks to borrow 10 billion dollars. The fed says sure. The govt.
sends federal bonds over to the Federal Reserve in exchange for cold hard cash. Wah lah! 10 billion dollars is no in existence.
But, as with all loans, the fed expects to be paid back interest! Which is defined above. Let's say the fed charges a flate rate of 6%. That is 10
billion x .06 to be paid back on top of the 10 billion originally loaned. The original loan amoint is often referred to as the principal.
600 million dollars. Yes I did the math. 600 million dollars is to be paid back on top of the 10 billion originally borrowed. So, the govt. is to pay
back the sum of 10 billion 600 million dollars over a specified period of time. Seems fair, right? Look closer.
I said previously that all money is created by the Federal Reserve. The fed only created 10 billion to loan to the govt , but they expect 600 million
in interest to be paid. Where is that 600 million created!?
It isn't. No, I'm not joking. It is never created. The fed only creates the principal. So the interest will NEVER be there. Welcome to modern day
slavery. We are all enslaved to fight for an amount of money that never existed.
At this point I'm sure you're thinking to yourself: "Well it's tough sometimes, but I've managed to pay most the bills I accrue, including
interest." Well my friend, you're fortunate. Infact, most of us here in the U.S. are. Thank god were bullies