Can someone explain why we need to have inflation as part of the economy please?

I'm not a stupid person, I just cannot fathom for the life of me why we have inflation?

If something costs £10 today why does it cost 10.50 in a years time? Things do not get more expensive naturally, if anything they should get cheaper with the advancement of technology?

I need to charge more for my time every year because things get "more expensive", but the reason they get "more expensive" is that wages have to go up because everything gets "more expensive!"

I really am tot able to get my head round it?

a reply to: nonspecific

It's a stealth tax used to fund Banker bonuses.
There is no practical purpose. It's a wealth transfer from the productive classes (people that make things and do things) to the capitalists (the people that use money and the money system itself, to make more money).

winning.

a reply to: nonspecific

We really don't.

When we were on a commodity based hard currency, gold, only mining or reclamation could cause inflation (hoarding could cause deflation btw).

The idea that we need inflation is absurd. The state (and borrowers in general) are the only parties that holds inflation in their interests.

a reply to: nonspecific

The simplest reason for that is the currency used. If 'tangible' like gold for instance, there is a specific amount of that available in the natural environment. Nobody can make gold from lead. It has to be mined or recycled. The increase to the worlds gold supply is fixed at a certain rate. People and countries buy it up so the price remains constant for the most part.

However, if the currency is paper, that can be printed out of nothing all day long. The more they print the more of it is in "circulation" the less it is worth.

For instance, you take a town somewhere that has the price of things at a certain amount, milk, bread, gas…

if you dump a truckload of cash in the town square overnight the price of those items rises, because everyone suddenly has more to spend. Inflation at a slow creep is the art of the financial people to print just enough to only make the price rise slowly so you hopefully don't notice your money is worth less and less.

On the other hand, notice that gold holds its value regardless of the "current" supply of notes or paper dollars.

The reason is due to what's called quantitative easing. Basically when a country's central bank prints more money, it devalues the money that's already in circulation, therefore you need more of that money to buy the same goods. If the bank stopped printing money, that would stop inflation to an extent but then I don't know what the consequences would be to the economy !

a reply to: nonspecific
There are many explanations of inflation. Posters above seem to go with an essentially monetarist explanation that it is a direct result of money supply.
Alternatively it can be viewed as real demand (as opposed to nominal monetary demand) outstripping production/supply.
It can also be seen as as a result price setting behaviour of firms in which case money supply is a function of inflation not the other way round.
Not a very helpful explanation but if economists can't give a single consistent explanation after centuries of study then you are unlikely to get a complete answer from a post on ATS.

a reply to: tajgill

Inflation occurs without quantitative easing, just the process of printing/minting additional currency without demand causes inflation. A low amount of inflation is actually desirable as it helps prevent severe economic downturns. ["Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others" Lars E.O. Svensson]

My understanding is lay, at best. It may be overly simplified. At least it's understandable, I believe.

First, I'd like to point out that the idea of 'gold' or some other tangible is no assurance of anything.

The value of gold is subjective and subject to the same forces as 'cash'. It's value is usually measured against cash! Therefore it's 'value' is also manipulated. If one's currency system is gold based, there is nothing stopping that gov't from printing/issuing more currency than the stores of gold. Bottom line is no difference in potential 'inflation'.

Inflation is now considered 'needed' in the sense that only via inflation can a country's debt be reversed without crashing the world's economy. I.E., if there is 1000% inflation over the next twenty years, in theory, and with a balanced budget, that debt is reduced to 10 % of it's previous levels, paper wise.

The biggest alarm, at least in the U.S.( in the day), to inflation was wage increases, believe it or not. Nothing kicked in inflationary fears more than that.

For simplicity's sake let's say the average person's expenses, food, rent/mortgage, insurance, so on, uses 90% of their income. That leave 10% for discretionary spending. DVD's, computers, so on. Now add in a meager 6% average wage increase. Again, for simplicity, say 2%-one third- goes directly to various income taxes right off the top.

That leaves 4% for more discretionary spending. Add the 4% to the original 10% which makes a 40% increase! That is massive. The retail industry would go nuts. Massive increases in buying and manufacturing goods, retail outlets, all demanding quick investment to take advantage of this 'increase'. All going to the same lending institutions looking for loans. Up go the interest rates, the prices for new properties, the wages for the new hired-in a supply and demand market- on and on.

An inflationary disaster! LOL.

Cash value, if I understand correctly, is measure against the GNP of the nation. I'm guessing not any more..LOL.

A sagging economy is deflationary, which we are obviously in, and the two forces, Id guess, are being juggled as we speak, so as to keep everything going. That deflation somewhat offsetting inflationary currency printing/issuing.

A house of cards ready to crash completely. deliberate or a confluence of vested interests, it doesn't really matter. the result is the same....

The scary part is this is just one of the many doom and gloom scenarios we have to watch for...

a reply to: nonspecific

So certain people can get richer. That would be my guess.

There are several reasons the bankers and Wallstreet investors will tell you we need inflation. They say we don't know how to fight deflation and that it's good for a growing economy.

Basically it's all BS. The biggest reason why the elites want inflation is because it helps create an illusion that businesses and the economy are growing. By creating inflation a business will continually post larger gains because money is worth less and it takes more to buy a product. The government helps create this illusion by putting out manipulated CPI numbers that excludes many things. Basically it's seen as if prices aren't rising it's bad for the economy. Inflation is A LOT higher than 2 percent or whatever last year was. Just look at housing and college tuituon.

The best situation would be 0 deflation and inflation or small percentages of either.

originally posted by: asmall89
Just look at housing and college tuituon.

The reason housing and college are issue is due to the easy money policy of the Federal Reserve loaning money for historically low interest rates. It created a supply and demand situation where people who have no business going to college end up going and this inflates the cost for those who should be going to college.

When interest rates return to a more normal level it will impact college and housing costs. Housing will increase as tangible assets become more valuable and college costs should decrease as the 'free money' is no longer available.

The best situation would be 0 deflation and inflation or small percentages of either.

You most certainly do not want deflation. Moderate inflation is much better for a robust economy.

a reply to: AugustusMasonicus

Why would deflation be a bad thing?

Would it be bad for "the economy" or would it be bad for the actual people?

You want to know anything about the economy just goggle it followed by the name "Mike Maloney".

a reply to: nonspecific

It increases the real value of debt and can lead to a deflationary cycle where the populace holds off on purchases waiting for the 'bottom'. A perfect example was the housing market crash which was a deflationary situation. Purchasers held off in the hopes that the Federal Reserve would continue to lower interest rates and that sellers would be prepared to shave more off their asking price leading to a depressed housing market.

a reply to: tajgill



The quantitative easing.....

a reply to: OtherSideOfTheCoin
Mike Maloney is a salesman not an economist.

The large reliance on interest within the financial system does put a lot of pressure and trends towards inflation. In Sharia law the practice of charging interest is banned. When reviewing the recent middle east conflicts, financial policy is a part of the mess.

When looking where money comes from such as bonds, interest is built into the system and leads onto inflation. Basically inflation works like a tax as you buying power is decreased over time. I do agree that the targets of the reserve banks around the world should work to achieve 0% inflation as it does help make for a stable economy.

Currency as it exists is broken by design.

First, you must understand that money=debt. If you don't know what that means, you'll need to go do some reading

Once you've grasped that, read up on fractional reserve lending. This is some very dry subject material, but more or less explains the root cause of everything that is wrong with the world today.

Once you understand how currency works, you'll understand that inflation isn't something we can simply stop- the whole money system used by central banking cartels would need to be destroyed first.


Of course, with zero inflation, we'd also need to have zero population change to keep the value of a currency stable.

Chew on that for a bit- if there are only 5 apples to go around and suzie pops out three kids, there aren't enough apples for every mouth.

a reply to: lordcomac

Inflation existed long before fractional lending, it is just another contributing factor.

a reply to: AugustusMasonicus

Agreed, but it really drives home the point that there's nothing we can do to stop it other than shut down central banking.
Here I am, ready to punch every banker in the world in the face, yet I've got loans and therefore am part of the problem.