How Inflation works

We’ve all heard of it, and most of us probably know the general idea behind it. For those who don’t or could use a refresher, this article is for you.

Inflation is defined by the New Oxford American Dictionary as, “a general increase in prices and fall in the purchasing value of money.” 

Let’s look at an example: After WWI, Germany was forced to pay a certain amount of money to the Allies. The amount was so high that the German government had to print more money in order to pay it. When it printed more money, the purchasing power of the Deutschemark fell because more money was in circulation. When the purchasing power fell, the government printed more money in the hopes of stopping the incoming depression. This led to the purchasing power falling again. As a side note that’s one of the reasons that Adolf Hitler rose to power. He was the one who coined the phrase “starving billionaires.”

Anyways, there are countless examples throughout history of this phenomenon happening: Rome, China, the Soviet Union, etc.

When the government inflates the value of your money, it is a hidden tax by the government. The value of your money goes down, while the government is able to pay “more” by printing more.

As Thomas Sowell says in his book Basic Economics“The big problem with money created by the government is that those who run the government always face the temptation to create more money and spend it. Whether among ancient kings or modern politicians, this has happened again and again over the centuries, leading to inflation and many economic and social problems that flow from inflation.”

I hope this article helps you and that you enjoy reading it as much as I enjoyed writing it. As always if you have any questions or even disagreement please feel free to comment below.

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10 thoughts on “How Inflation works

  1. Yay! If I read one more printed analysis about how tight gasoline supplies or a bad coffee harvest leads to inflation, I’m going to gag. I majored in econ in college (more years ago than I like to admit now) and applaud you. Inflation is purely a money phenomenon, not a “real stuff” phenomenon.

    Liked by 2 people

      1. In the 1978-82 era was there more than one kind? 🙂 I was fortunate enough to be in a place (Ball State University in Indiana) where some key members of the faculty took classical/supply-side theory seriously during a time when it was being hotly debated. Their disdain for Keynsian economics rubbed off on me.

        Liked by 1 person

  2. As everyone else said, great piece, short, sweet, and to the point. You managed to explain the concept without diving into 7 levels of complexity.

    Wondering what your thoughts are on the concept that inflation is actually beneficial to a certain subset of people, essentially those who are taking on one-time or recurring debt for future benefit, like students and farmers.

    -John

    Liked by 1 person

    1. Yeah, inflation is VERY beneficial to a certain group of people. Government, crony capitalists, etc. But what I’ve found in my many many years (by years I mean the 6 months that I’ve been researching) is that government has a vested interest in keeping the status quo, what I mean by the is the government has an interest in keeping the big, million job companies afloat and they can do that by passing any number of laws minimum wage being the most common. Big businesses can achieve economies of scale and thus can afford the minimum wages while smaller, mom and pop businesses can’t. Here’s a video that I would recommend. https://www.prageru.com/courses/economics/big-government-kills-small-businesses

      Liked by 1 person

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