There's Inflation And Then There's Inflation.

 Today we will address "inflation", the great. nemesis of economist and politician alike, not to mention the great wallet-rapist.

Before we can speak intelligently on the matter, it would seem fair to consult the dictionary in order that we may understand the meaning of "inflation".  To wit:

dictionary.com:  

 

inflation, noun

1. Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency (opposed to deflation).

Mirriam-Webster:

2: a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services.

 

wikipedia:

In economics, inflation refers to a general progressive increase in prices of goods and services in an economy.  When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.

As we can see, these definitions are neither very technical, nor are they rigorous.  They do, however, offer enough for the purposes of this discussion.  Almost.

The problem with most definitions of "inflation" is that they address only the most broad sense of its effect: the loss of purchasing power as made manifest by rising prices.  What they do not explain are the reasons for it, a problem we shall remedy forthwith.

To begin with, you should be made aware that in general there exist two basic sorts of inflation, each stemming from different causes and usually manifesting slightly differently in ways that are important to understand.

The two broadest categories of inflation are monetary and push-pull.

Monetary Inflation

So-called "monetary" inflation is more accurately termed "currency inflation" because the nations of the earth no longer use money, but only mere currency, the differences being fundamental, very significant, and constituting a discussion for another time.  The cause of currency inflation is the generation of ever higher volumes of currency.  But what does that actually mean?  Glad you asked.

Imagine a simple economy which has 100 units of commodities in its market, and 1000 units of currency in the hands of the people who constitute that market.  A simplistic statistical view of this arrangement might say that on average, for each item available for sale, there exists ten units of currency with which to purchase those commodities.  The imporant idea here is to realize that there is some notion of a ratio between what is available for purchase and the currency available for making a purchase.

If my some magical means we suddenly find our economy "blessed" with 2000 units of currency (yay, we're rich!), the ratio of commodities to currency has now halved from 1:10, to 1:20.  While this may superficially seem a good thing, there is a <AHEM...> price to pay for this turn of fortune, both literally and figuratively.  Now that people have twice the amount of cash in their wallets, what will they do with it all?  Save it, or spend?  Once again, keeping things simplistic, the tendency is to spend and in our little economy that is precisely what people do.  The deterrent to spending, which was the 1000 unit cap on available money, economy-wide, has been raised to twice its value, meaning a lowered deterrent.  People now feel freer to spend, and that tends to be precisely what they do.

As spending rises, the supply of available commodities falls and in classical economic fashion due to what must inevitably become competition between buyers for that which is available, prices rise.  This phenomenon is as predictable as the sunrise.  

Now, we all know that all else equal, when demand rises, producers will increase output, which tends to minimize inflationary increases, but we often still experience momentary increases in pricing until supply can catch up with demand, which leads us to the other type of inflation.

Push-Pull Inflation

The other type of inflation to which economies may be subjected is what I call "push-pull".  There are other names for it, but let us stick with this to keep things once again simple.  Push-pull inflation refers to the causes and consequences of supply and demand. 

Imagine once again a simple market within our economy, that for widgets of which there are 10 units available per unit of time and a consumption rate of 10 units per unit of time.  In other words, the push (supply) side and the pull (demand) side are in equilibrium. Let us further say that the current going price of a widget is 2 units of currency.  

A change in the push-side circumstance leading to a decrease in the number of available widgets will cause stresses in the pull-side of the economy.  The same number of people will be competing for a decreased number of widgets.  The same result is realized when the demand for widgets rises, once again illustrating how the ratio of demand-to-supply is the key factor in determining price in this type of inflation.  

A fine real-world example can be seen in the precious metals markets from a few decades ago when several of the largest platinum mines in South Africa were taken offline for necessary upgrading.  When the mines announced the projected five-year shut downs, Japanese car manufacturers immediately begain buying up ever scrap of rhodium on which they could get their hands on in anticipation of shortages.  Rhodium is a byproduct of platinum mining and is essential to the production of catalytic converters as the actual catalyst.  No catalyst, no converter.  No converter, no can sell cars in first-world markets.  No sell cars, no eat supper or pay mortgage.  This was a very big deal.

Because of this precipitous rise in demand, the price of rhodium shot up from $900/ozt to over $27K/ozt!

To make this example even more perfectly illustrative, when the mines announced their reopening two years earlier than predicted, the price of rhodium fell through the floor even more quickly than it had risen, and many people lost their shirts in the deal, which further teaches us that it is unwise to speculate in precious metals markets, especially under such conditions.

As the supply-to-demand ratio lowers, prices rise (inflation).  If the ratio rises (increased supply-to-demand), prices tend to fall (deflation).

So What's The Difference?

If the net effect of inflation is increased prices regardless of cause, then why should we be concerned with the differences in those causes?  Precisely this: the tendency with push-pull inflation is to be momentary with eventual correction to normal, all else equal.  Free markets by their nature tend to adjust to the vicissitudes of supply and demand.  Any sudden and sharp changes in either supply, demand, or both tends to lead to changes in prices, but these changes tend to be narrow in effect, though that is not always the case.  

For example, if there is a sudden drop in the availability of Unobtainium, the raw material from which widgets are made, the price of widgets will rise, but the price of milk and bread are likely to remain unmoved.  If, on the other hand, the economy finds itself suddenly short of crude oil, the effects may be far more widespread because petroleum is a far more basic commodity than is Unobtainum. While the one effects only the production of widgets, the other makes itself felt in plastics, energy, lubricants, transportation, fertilizers, pharmaceuticals, and a host of other areas.

But on the whole, push-pull inflations do tend to be far less deeply and widely felt, and tend to correct themselves over time.

Currency inflation, on the other hand, tends to be very long term at best, and is most often permanent with far broader and deeper effects because the currency touches quite literally every corner of the economy.  One thing that should be understood here is that currency is also a commodity.  It is, in fact, the universal commodity.  In this respect, its effects are very much like that of physical market commodities such as Ubobtainium and petroleum, and we can now clearly see then that the ratio of the universal commodity to the demand side is crucial to the state of prices in the economy.  As that ratio rises (supply goes up), it's price (effective value) falls in perfect harmony with the theory of supply and demand.  The value of a unit of currency is directly tied to its ability to purchase, say, a widget.  The more units required per widget, the lower the value per unit currency.

The reason currency inflation tends toward the permanent is because money supplies rarely contract.  Once generated and released into the wild, a unit of currency becomes somewhat difficult to retrieve, mainly because people generally do not much cotton to giving up their cash for nothing in return, which is the very definition of theft, and which is why people are typically unhappy about taxation.  Imagine that.

It ain't rocket surgery.

And So Summing It All Up...

We now understand the two basic categories of inflation and how they tend to effect prices.  We have learned that it's really all about relative values as expressed in the ratios of things like units of currency available for spending in the context of given amounts of available commodities for purchase.  We have noted that with push-pull inflation the rises in price tend to be momentary and narrowly applied, whereas with currency inflation the rise in prices tends toward the very long term or permanency and hits the economy universally, leaving no market untouched.

And so we can now readily see that when the great intellects of "government" begin churning out currency in the ways we have been witnessing with the central banks like the Federal Reserve, it is no wonder that the currency inflation has been so high over the past century, especially after nations abandoned the so-called "gold standard" where a unit of paper currency actually represented a corresponding unit of physical gold, which for example was the original definition of a "dollar".

I will finish by stating without the least trace of equivocation that currency inflation serves you no whit of good, especially if you have cash savings.  Currency inflation is always induced and has, along with outright taxation, been a primary means of stealing away the accumulated wealth of presumably hard-working and honest people.  This is a topic all its own and has been covered extensively by others far better qualified to expound on the matter than am I.

It is my wish that you will come away from this little discussion a little more smartly aware than you were prior and that this knowledge with serve to motivate you to make better educated choices based on improved views on the matter at hand and that you will realize the import of these issues.  Discuss them with your families, friends, and anyone else who will listen, for this is the brand of information of which Theye are well pleased to have you remain ignorant.

Don't let Themme win.  We still retain the ability to throw the vampires from out necks, but it isn't going to happen by itself and you can be damned certain that there is no cavalry on its way to save the day.  We either save ourselves by coming together as Freemen watching each others' backs as effective covers of our own, or we sit idly, perhaps wringing our hands as the Tyrant closes the noose we have allowed him to place around our necks.

Give it all some good thought, and here's to hoping you come to the good conclusions and decisions.

Until next time, please accept my best wishes.