What is Inflation?

Inflation is inflating the amount of money in circulation. That is all inflation is. Nothing more, nothing less.


WHAT CAUSES INFLATION?

Inflating the amount of money in circulation is different than simply increasing the amount of money in circualtion.

The amount of money in circulation increases naturally each year, mainly through earned interest. If you have $1000 in the bank earning 2% interest, at the end of a year you will have $1020 in the bank. The earned interest causes the money supply to increase naturally. The earned interest in this case does not inflate the amount of money in circulation.

When the Federal Reserve causes interest rates to be above where they belong, you start earning more interest than you should, and the extra, artificial interest, causes the money supply to be inflated, causing inflation.


RAISING INTEREST RATES IS NOT THE ANSWER, IT'S THE CAUSE

This is why it is foolhardy, at best, for monetary authorities to raise interest rates to stop or contain inflation. You cannot put out a fire by throwing the liquid gasoline on it. You cannot stop or contain inflation by doing something that will cause inflation, as raising interest rates above market levels will do. If raising interest rates could stop or contain inflation, then countries like Brazil and Mexico, which have had some of the highest interest rates on the planet over the last two decades, would have had the lowest inflation rates in the world. The opposite has been the case in Brazil and Mexico, because raising interest rates above market levels CAUSES inflation, not prevents it.

Another way to look at it is, if raising interest rates stops inflation, then lowering interest rates causes inflation. That's wrong also. If interest rates are below market levels, the money supply will not grow naturally, as little interest is earned. In Japan for almost two decades now, interest rates have been almost non-existent. If low interest rates causes inflation, then Japan must have had the highest inflation rates in the world over the last two decades. In reality, Japan has had virtually no inflation over the last two decades, as the low interest rates have prevented even natural money growth from occurring much, let alone any inflating of the money supply. By keeping interest rates below market levels, Japan has even had to deal with occasional deflation, as little natural money growth has occurred.

The amount of money in circulation can also be inflated anytime the Federal Reserve decides to. The Federal Reserve can simply release money into the nation's economy through the banking system, anytime it pleases. The extra money released into the economy causes the amount of money to be inflated and causes inflation.

The two ways mentioned are they only ways the money supply can be inflated. The only way to have inflation is when the Federal Reserve causes it to happen. Inflation cannot occur by itself. If the Federal Reserve disappeared tomorrow, and no other money creating government body was created to replace it, we would never have inflation in this country.


INFLATION IS NOT AN UPWARD MOVE IN PRICES

A common misconception popular today is that inflation is an upward move in prices. An upward move in prices is not inflation, it is a by-product of inflation. When inflation occurs, prices will move higher. However, prices can also move higher without inflation. For example: the price of oil can move dramatically higher due to higher demand, wars, supply problems, shipping problems, and a host of other reasons, none of which have anything to do with inflation. The rise in oil prices has no effect upon the amount of money in circulation. The amount of money in circulation is not inflated in any way, shape or form by a rise in oil prices, or any other rise in prices. If something does not cause the amount of money in circulation to be inflated, then it is not causing inflation.

If inflation was a rise in prices or price levels, then a rise in oil would send inflation rates up in every economy. Inflation would be a global phenomenon. The facts say, clearly, that inflation is NOT a global phenomenon. Over the last two decades, Mexico and Brazil have had high rates of inflation, but Japan has not. In the early 1930's, many economies had deflation, but the German economy had massive inflation. Inflation levels are specific to each economy that has its own money supply.

Whenever you hear someone say that inflation is a rise in prices, or price levels, you can totally disregard anything that person says concerning economics. Anyone who does not know what inflation really is, has little hope of understanding anything to do with economics. And yet today, the economics community is filled with simpletons who continually spout the notion that a rise in prices or price levels, is what inflation really is. If that is so, then please explain to me how a rise in prices causes the amount of money in circulation to be inflated? It does not because it cannot. How can a rise in prices cause the amount of money in circulation to be inflated? Only a simpleton, someone completely lacking in cognitive reasoning skills, would spout such nonsense.