Causes of Inflation – 8 Things you should know.
- April 8, 2016
- Posted by: Roman Sadowski
- Category: Best Forex Blog on The Planet
The Real Causes of Inflation.
8 Things YOU Ought To Know.
And how they affect you!
We constantly hear on financial media, how important inflation is for the economy in general, BUT, what are the real causes of inflation?
Mainstream economics will bend over backwards to convince you that higher inflation is better rather than worse for you.
I could never understand how RISING PRICES could possibly be good for me?
I want to show you the real causes of inflation, and tell you what inflation does to the economy and your personal wealth.
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.
When the general price level rises, each unit of currency buys fewer goods and services.
In modern days inflation is a major weapon escort kızlar used by central bankers to fight economic fluctuations in the short run, and this central bank manipulation is one of the major causes of inflation.
Governments never anticipate anything.
The economic well-being of a taxpayer is the eskort least worry to the average policy maker. Politicians are always surprised by economic downturns and “sudden” contractions in aggregate supply or aggregate demand in the market.
Once deep in debt with massive unemployment, the ability to tax is limited. In most scenarios, governments running massive deficits and holding huge national debts have little or no option to borrow money in the open markets.
In such cases the action taken is always to emit currency into the system to bring short term contractions back to the natural rate of output. Having the monopoly for counter fitting, legal tender has no relationship to any commodity any more.
Central banks turn to currency production as a solution for economic turmoil, not realising that this tactic is among the main causes of inflation in the first place.
Money printing practice is an Madult.net attractive and cheap method to manipulate aggregate demand curves. No minister for finance could resist it!
As price levels rise – demand for money is expected to rise too. People having more money are supposed to create demand for goods and services thus boosting aggregate demand curve and bringing the supply curve back to the long run natural rate of output.
The new, short run equilibrium is now back on track although with new higher price levels to be paid by the taxpayer.
Below is a list of some important implications that inflation brings upon the economy and us.
1. The inflation tax
First of all inflation is nothing else but a tax imposed by governments onto all currency holders in the economy. While governments run massive Ponzi schemes and are not profit driven organizations, they raise money to pay for all spending through inflation.
We all gauge our wealth with the amount of money we hold. In fact the purchasing power of the money we hold measures our real wealth.
All money holders pay tax in the form of inflation.
The more money you hold the more you have to give up.
Inflation robs genuine investors through capital gains tax. The money you have earned over a period of years is subject to capital gains tax, which does not include money erosion caused by inflation.
If you invested in stocks and make £1000 over the year, your income is taxed at a fixed rate. Inflation has shrunk your £1000 to £900 (10% inflation per annum). You still have to pay income tax on you £1000 gain.
Irvin Fisher (1867-1947) noticed a relationship between nominal interest rates and the rate of inflation. As people tend to anticipate inflation, the nominal interest rate will reflect inflation expectations in the long run.
We can question the “Money Neutrality Theory” which states that inflation does not affect the real variable of production function.
If increased money supply affects nominal interest rates we notice distortions in the market for loanable funds. Loanable funds are the part of production function K (Capital). National saving becomes an investment and capital for production growth.
If interest rates rise due to inflation, we notice less incentive to borrow capital investment thus we experience lower productivity and growth in the long run.
3. Purchasing power erosion
If the extended amount of money chases a fixed amount of goods and services, it will send prices higher, this is another of the main causes of inflation.
As your money can buy less every day, your purchasing power disappears together with your real wealth, another of the pernicious effects of inflation.
“Main stream economists” agree that inflation does not reduce people’s purchasing power as wages increase hand in hand with prices.
According to the “sticky wage theory” wages tend to remain steady in a deflationary environment. Due to the minimum wage regulation, employer’s obligations and workers union’s activities, wages tend to remain high while overall prices drop.
Why wages would behave differently in inflationary periods?
In the short run, the inflation rate will increase with a faster pace than wages. Right?
If the same principle is applied to the inflation period we will see a significant decline of purchasing power.
Prices go higher before wages adjust.
This metaphor describes inefficient resource allocation in an economy.
People not willing to hold money make frequent trips to the bank, wasting time and energy instead of allocating their efforts towards genuine production and growth.
Inefficiencies, one of the consequences of inflation, are also visible in human behavior.
Inflation seen as a tax to government alters people’s behavior. People driven by the incentive not to pay tax allocate their resources badly causing losses in the economy.
5. Menu Costs
Another of the causes of Inflation is that corporations lose a lot of money.
Companies plan prices ahead and deploy resources towards catalogue print outs, price tags etc. If the cost of their “menu” is significant, companies will experience a loss of revenue due to a rapid rise in price.
They will not be able to keep up with the pace and will be forced to under charge for their product. Again, dead weight losses are one of the consequences of inflation in an economy.
6. Relative Prices, Mess and Confusion
Extended money supply sends false signals to the markets causing overall confusion and misinterpretation of the actual facts.
Relative prices, in other words prices compared to other prices in the economy might vary in inflationary periods. Confusion and instability of prices on the open market causes investors to make inappropriate decisions.
They allocate resources in an inefficient manner. Their decisions are based on relative price observation. Inflation disturbs the relative price volatility and causes abnormality in the market supply.
7. Investment decisions and speculation
Inflation causes money to show up at different values over a period of time. Most investors on the stock market value their portfolios according to a firm’s profits. If profits are expressed by revenue minus costs, during inflationary periods, there is a significant interruption in real values. It causes difficulties to recognize efficiency thus causing loss on investment.
Higher stock and commodities prices are another one of the consequences of inflation, artificially high prices create an image of wealth.
People speculating in stocks during inflation will allocate money towards those artificial gains and divert resources from being used more efficiently.
From past experience on the stock market we conclude that speculative greed ends in tears and massive revenue losses.
Let us assume that money supply stimulates job creation and brings the demand curve back to a rate of output and higher prices, the effect is only the tradeoff for well-being.
Here we should ask ourselves, where did it all started?
Why did we experience short run economic fluctuations in the first place?
Overall short term fluctuations are blamed on natural disasters. A sudden shortage in commodities causing prices to climb. Increased cost of production decreases output and causes recessions and unemployment.
If we let the economy adjust and let the efficient market forces play out, we probably would experience much milder short term distortions. Government and Central Bank intervention is one of the route causes of inflation. Absent these interventions, the economy would not experience artificial booms and the resulting busts.
• All short term fluctuations are caused by government’s counter fitting practices called Inflation.
• Inflation is used to extend cheap credit to the public to artificially pump up foamy economies. Money expansion increases GDP – a modern measure of well-being.
• the Government and the Central Banking System are the causes of inflation and all of the inefficiencies described above, bubbles and bursts.
• Interest rate manipulation from the centralized, socialistic institution called The Central Bank gives market false incentives and sends resources to the wrong locations.
• By bond auctions, fiat currencies and the fractional reserve banking system, governments can “stimulate” the economy by adding more debt to it.
• All recessions we experienced in the 20th century were sparked by uncontrolled, extended and easy access to cheap credit created by INFLATION!
• Government programs with guaranteed mortgages to an already insolvent public gave a free ride to speculation in the property market.
• Artificially low interest rates as a central bank’s solution to a crisis called bubble dot com. It has sparked an overheating process in real estate.
Guess what is the solution to the problem this time?
Print more money and keep spending…