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

a reply to: lordcomac
Money is just a store if value based on faith that it will be redeemed. As it has no intrinsic value itself it can and should be used to facilitate the creation of real value. Hence the reason we have reserve banking.
Why should economic growth (or as you I presume jokingly suggest population) be limited by an arbitrary supply of currency?

a reply to: nonspecific

In a nutshell...

Inflation is a game of smoke and mirrors.

It gives the illusion of "economic growth" (cough laugh cough). This illusion serves the purpose of making it look like fiat currency actually holds some sort of tangible real-world value (again, cough laugh cough).

Without inflation, fiat currency and the religion of Fractional Reserve Banking™ (read: central banking) could not exist. The two would be null and void, useless.

The banksters need inflation to keep their game going strong. Another words, it's the necessary evil to support an economic system with a foundation that's set from a debt-based currency.

Thus we end up in a neverending continuous cycle of growth -> crash -> start all over again. It's the nature of beast.

Hence the reason why I laugh at the term "economic growth"... because it will inevitably cycle through to another crash (big or small, doesn't matter) resulting in any "growth" being completely moot, no matter which way you look at it.

Another words: two steps forward, four steps back.



Without fiat currency, inflation would not be needed... the cost of living could remain exactly the same for the next 200 years with wages also staying the same (and vice versa), and the world would not stop spinning. But that's not a concept any of us can wrap our brains around because we have never seen such a thing. That world stopped existing the minute we replaced tangible currencies (precious metals, trade goods) with paper notes several centuries ago.

With debt the reason new money is made is where it all starts. You produce more money from nothing except from your signature on the form for the reserve bank to begin. When everyone does this is produces more money and with more money out there it devalues the dollar. So to make up for the money losing value inflation is needed to correct the shortfall for the already flawed system.

This why many believe that inflation will go berserk in America soon especially when you have other countries getting rid of all the American money they have for gold.

May I suggest www.youtube.com...

a reply to: CranialSponge
Fractional reserve banking predates the central bank system by sometime. Central banking just regulates the practise.
Also all currency is debt based regardless of it being fiat or backed. This isn't a bad thing it is just people hear/read the word debt and have the negative associations of that word. It is important to remember that where there is a debt there also is a credit.
Your post would suggest that you don't believe we have economic growth with a fiat currency. The economic history of the The US and western europe over the last 70 years shows otherwise.
A backed currency just acts as brake on economic growth based on an arbitrary amount of your chosen commodity. Also why assign more value to precious metal than anything else? The value if that is every bit as faith based as a fiat currency.

a reply to: nonspecific

First few explanations in this thread are short sweet and ACCURATE

originally posted by: nonspecific
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?

It means that the currency that anyone holds becomes more valuable which, in a self adjusting marketplace, will eventually lower the price of goods and wages. It also makes debts increase because the value of the loan has increased, as has the interest.

Inflation causes price and wage increases and decreases the comparative value of debts. The reason that most government economists choose to advocate for inflation as desirable is because it provides a mechanism to gradually dilute the value of its liabilities.

It is a way to avoid bankruptcy by collapsing the currency.

Without central baking, fractional reserve banking is fine as long as everyone understands that their deposits are not guaranteed to be there tomorrow. I suspect people will prefer to go with robust banks who engage in less risky lending practices.

The fed must go though, the constitution does give the federal government the power to print currency so a gold backed dollar is the best option.

a reply to: ScepticScot

Fractional reserve banking predates the central bank system by sometime. Central banking just regulates the practise.

The two are one in the same since central banking took control of the whole shindig. Two sides of the same coin. And quite frankly, fractional reserve banking was just as guilty of fraud and corruption.

The sole purpose of any banking system is to act as 'middle man' and make profits from doing absolutely nothing tangibly productive or beneficial to the economic strengths of a country.

Also all currency is debt based regardless of it being fiat or backed. This isn't a bad thing it is just people hear/read the word debt and have the negative associations of that word. It is important to remember that where there is a debt there also is a credit.

I disagree.

A debt based currency without an equivalent stable commodity to back it up is absolutely a very dangerous game to be playing. "Trust us, we're good for it" doesn't cut it in a game that's purposely rigged to be full of peaks and dips along the way.

Your post would suggest that you don't believe we have economic growth with a fiat currency. The economic history of the The US and western europe over the last 70 years shows otherwise.

Our central banking history is the very thing that proves there is no economic growth with fiat currency. Any asset strengths we've acquired along the way are credited to good old fashioned man power - production and population growth. It most certainly is not credited to fiat currency transactions.

A backed currency just acts as brake on economic growth based on an arbitrary amount of your chosen commodity. Also why assign more value to precious metal than anything else? The value if that is every bit as faith based as a fiat currency.

Since when does a commodity currency stunt the growth of a country ?

That backed currency acts as a brake to regulate market transactions. Without that commodity (doesn't matter if it's gold or chickens), money can now be made out of thin air. Why do you think central banking stepped away from the gold standard ? It allowed them more freedom to rig the game.

It doesn't matter that a tangible asset's fair market value is arbitrary. It carries with it an intrinsic value just simply based on its physicality. Something that fiat currency does not possess.



I'm afraid we're going to have to agree to disagree on this subject.

a reply to: CranialSponge
Why do you think having a currency backed (and it isn't really) by a physical commodity gives it any more value than a fiat one?even if a currency is backed by a commodity it is still faith based. Do you really think the market value of gold is based on its real utility value?
even if a currency is linked to a commodity it is still debt based. Being a fiat currency just frees it from an artificial restriction based on the supply of whatever the commodity is.
It is also important to note that in reality the relationship between a currency and commodity can be changed at the will of government. I find it odd that that those who support a return to a gold standard or similar generally claim to be free market enthusiasts when really they are advocating more government power.

Inflation is the increase in prices caused by increased demand for goods. What happens on the floor of the stock exchange illustrates it nicely. When a lot of people want to buy a stock, the price rises as long as the buyers are willing to pay. Conversely, the price deflates when there is less demand for the stock.

In the economy as a whole, demand for goods can have numerous causes, not just availability of money to pay for the goods, but generally, economy wide demand for goods in general depends on the amount of money circulating. The word circulating is very important.

Recently, in the Toronto Star, there was an article saying that Milton Friedman's ideas about the connections between money in circulation and inflation had been proved wrong because the FED has been doing a lot of quantitative easing, that is, creating money, but there has not been a correspondingly large amount of inflation.

The Star article didn't say so (there are many, either disingenuous or ignorant things written in that paper), but I think this is because what quantitative easing has occurred has not found its way into the money circulating in the "normal" economy. It is circulating in the "meta economy" of financial instruments of various sorts, in which banks and institutional investors participate.

I think a lot of the pundits that are always predicting economic catastrophe, caused by "Helicopter Ben Bernanke" (throwing bundles of money out of the chopper onto Wall St.), are not aware of what is really going on (hard to believe), or simply don't want to be too specific about it.

The point is that is that if the amount of liquidity, circulating in the "meta economy", should ever find its way into the general economy, it will be Berlin in the 1920s all over again. Friedman wasn't wrong. He just didn't imagine (what sane person would?) the sort of developments that have gone on in the financial world in the last decade or so.

I'm not an economist, so take all of the above with a grain of salt. It's just a layman's impression of what has been happening.

The answer has to do with the per capita share of the money supply.

If you have $100 in circulation and a 100 person population each person will on average have $1. Now if you advance 10 years and the population has risen by 4% per year you now have a population of 148 people. This means that each person only has an average of $0.675 and as such with an equal sized money supply you now have less. The reason this is an issue is that it means $1 from a year prior is worth more than $1 today. This places the incentive on saving money rather than spending it. When this happens the velocity of money falls (how much and how quickly it moves through the economy) which raises prices and reduces spending. It also brings to a halt any concept of future investment as money now is worth more than money in the future, so investing doesn't exist.

The above is why economies are based on growth, and why economic indicators use growth as their metric. If you don't have inflation money naturally gains value which makes it better to hoard money. The only reason people spend money (investments, luxury goods, or anything else) is because that money is worth less tomorrow than it is today. This encourages a person to spend, however to make this statement true you must increase the money supply and the increase must outpace the increase in population.

What really interests me about today's economic world, i.e., the one dominated by the Anglo/American banking establishment, is what sort of agreements or mechanisms are holding the massive amount of money circulating in what I called the "meta economy", from getting into the normal economy of trade and commerce.

That is what must be causing so much concern among various knowledgeable commentators.

There must be a lot of "face time" involved in coming to understandings about this. That money, the money circulating within the meta economy, is already virtually worthless, and everybody knows it. Allowing it into the normal economy would be like letting neutered mosquitoes into the general population of mosquitoes in order to wipe out that population by breeding with it.

The meta economy, which, decades ago, would have been considered the upper reaches of the normal economy, must be severely constricted by this situation. It is constipated with worthless money. This has an effect on international commerce and investment. It may have led the United States to earn its living through war because it dare not start to release "meta economy" money into the normal economy of trade and commerce for fear of precipitating world wide hyper-inflation.

The general and diffused pain of hyper-inflation, which would be felt by all, has been compressed into ammunition that has been or will be downloaded onto the people of Libya, Iraq, Egypt, Syria and Iran.

Of course, around the world, it is acknowledged that the Americans are no longer trustworthy in fiscal matters. China can buy whole industries, but the Americans cannot, except among their friends who are part of the "meta economy" and know the rules by which all have agreed to use "meta money".

The whole thing has to be very precarious. It is difficult to see how the Anglo/American block is going to extricate itself from this situation.

Again, take all with a grain of salt. I am not an economist.

a reply to: ipsedixit

Basically what you're getting at is something I refer to as the velocity of money. How quickly it changes hands. The trillions the largest banks and companies are sitting on, is largely out of the economy. It is being traded only among those entities and very slowly at that. It has a low velocity, and thus low economic impact.

However, if you look on a more individual level such as among a group of people each making 14k/year in a poor town (using my town as the example here). There is no savings and no investment. The money goes into a persons paycheck, and then almost in it's entirety back out into local businesses. The landlords get their cut and spend lavishly, while the restaurants, shops, and everything else soak up the rest. What they soak up goes back into wages and replacement product, and the cycle begins again. This results in a high velocity of money.

A characteristic of a high velocity of money is that there's a lot of work to be done, it often involves lower paying tasks that are made up for with volume. This in theory puts more people to work, which then creates even more work. In a micro economic system, this results in everyone being fairly well off since each person is effectively bartering their services. Going back to the OP though, inflation is a macro economic issue. As the population grows, each person in this system gets less money which results in a decrease of wages. This in turn brings about a decrease in spending, which slows the economy, which then completes the downward spiral by removing the need for jobs.

This is why we have inflation, a static money supply by definition deflates over time. As long as the population is increasing, you must also increase the money supply in order to maintain parity.

Now, if you're quick with math you'll notice a small issue here. We'll use my previous posts example:
You start with $100 in circulation for 100 people. Each person has $1.
10 years down the line at 4% population growth you now have 148 people so each person has 0.675. If however you also grow the money supply at 4% per year you have $148 for 148 people. Each person still has $1.

Now here's the trick. That $148 only maintains the value of $1 per person in my currency system. In another system which started at parity but only grew 10% over the same time frame (to $110), their currency is now worth 34.5% more than mine. So if I take my extra money and trade it for their money, rather than stay in the same place I gain 35% in value. Furthermore, I can take this 35% in value and loan it out at say 10% interest (non compounding to make it easy). A year later my investment has produced 45% more. I can then convert it back to my currency and come out ahead. This is the basics of what certain people do when they invest.

a reply to: Aazadan

Thanks for the explanation.

The current situation also involves massive amounts of fraud. The issuers of money injected huge amounts of it into the economy in order that their very close friends could buy things that were worthless. When these friends found out that they had sunk "everything" into worthless items, the issuers of money said, "Don't worry. We'll give you more money that will replace the money you lost."

Virtually none of that money reached the level of commerce you mention. It is circulating among financial institutions. Non-governmental spokespersons, pundits if you will, believe that money is a disaster waiting to happen, if it ever hits the ground.

a reply to: ipsedixit

Part of the strings attached to that money, was that they couldn't introduce it into the general money supply, as such we're only working with a fraction of what's out there. The idea is that they could sit on a cushion and somewhat have hard assets to back their loans (though at 50:1 leverage rates they can still only cover 2% in a bank run). It was a desperate solution to a desperate problem.

From my understanding, which very well could be wrong (these things are so complicated the people in charge of them admit they have no idea how it all works, so what chance do I have) the fed can try and go one of two routes here.

The first is to continue propping up the banks with money they can't spend. Eventually this is going to isolate them from the rest of our economy and we can freely let them collapse with few ill effects. It also gives the government the authority to crash them, reclaim the money, and give it to FDIC if a crash does happen. Crashing a bank is a very bad idea though because of derivatives.

The second is to keep the banks functional for the time being and then start breaking them up so they each have a smaller economic impact and are isolated from each other. This would be the ideal set up having a distributed banking system, while still retaining the advantages of a central bank. Essentially, what we would have to do here is place an asset cap on each bank and make them localized. In theory this is doable but no one wants to take charge and suggest it. This is largely because Goldman Sachs writes the paychecks of the people who become the regulators and policy consultants.

I'm going off line for a while but I agree with what you said, except that it makes too much sense. What we have seen in the past is "bail ins" where the central authorities claw back the "hardest" currency from the bank accounts of the general public.

They can make "fiat money" (the huge volume of meta-money, referred to , above) disappear as easily as they made it appear, if they really want to, but in order to participate meaningfully in the economy again, one means is to claw back hard currency from the public.

What we have now, I think, is a two currency system, and that has been tried before to great effect by the Germans prior to the Hitler era and then during his time as well. Ours is unannounced, though.

Anyway, that's it for me, for now.

The Federal Reserve has a way of fixing inflation at a "desired" level. The reason inflation is considered desirable is to discourage people from putting their savings in the mattress. Inflation forces people to seek a return on their cash to preserve the value of their savings. This helps the banking and financial services industry.

Put it this way, if everyone has a million dollars, a million dollars wouldn't buy you nothing anymore, it would have no value. Theyre reprinting money everyday purposely, which puts more and more money out, making it easier to obtain. So then what happens? It keeps dropping value, which makes things more and more expensive. Hope that helps

a reply to: nonspecific

Inflation is simply the result of 'supply and demand'

There was one other part I forgot to mention too. Capitalism only works if inflation is positive. If someone works and makes a product they sell there has been no change to the system, one person gains X and others lose X. Inflation allows more money to be inserted so that one person gains X but others lose X-inflation plus get the product. It's only through this mechanism that an economy based on some people gaining and some losing can work.