Simple Facts About Inflation

Analyst, Author, and Owner of Kelsey's Gold Facts
January 13, 2022

When most people talk about inflation, they are usually referring to the higher prices they pay for goods and services. That is not inflation.

Most of what passes for explanations of inflation and its causes are convoluted and confusing. It is like looking into a pond of muddy water and trying to ascertain what lurks blow the surface.

Below are some facts about inflation that should help clarify things:

INFLATION FACT NO. 1 – INFLATION IS CAUSED BY GOVERNMENT

A) It started with clipping coins; a practice whereby existing coins in circulation that had been collected via taxation were ‘clipped’ and the fragments were melted down and recast into new coins.

B) In the late 18th century, the French government began a disastrous issue of paper money that led to hyperinflation (Fiat Money Inflation In France) and revolution.

C) Reeling from the effects of World War I and in an attempt meet their financial obligations, the Weimar Republic tried to print their way to solvency. Their efforts spawned runaway inflation and economic collapse for Germany a decade before the Great Depression.

C) Today, inflation is the product of Central Banks. The inflation is accomplished by the continuous expansion of the supply of money and credit.

INFLATION FACT NO. 2 – ALL GOVERNMENTS (Central Banks) INFLATE AND DESTROY THEIR OWN CURRENCIES

Since 1913, the debasement (expansion of money and credit) of the US dollar by the Federal Reserve has brought about a loss in purchasing power of ninety-nine percent. Generally speaking, it costs one hundred dollars today for what would have cost one dollar a century ago.

Another way to say this is that one dollar today is worth only one cent compared to a century ago.

INFLATION FACT NO. 3 – THE EFFECTS OF INFLATION ARE UNPREDICTABLE

The higher prices for goods and services which most people casually refer to as inflation are not inflation at all. They are an effect of inflation.

The higher prices result from the loss in purchasing power in the currency (US dollar, etc ).

Over time, the intentional inflation practiced by central banks leads to effects that are volatile and unpredictable. (see The Fed’s 2% Inflation Target Is Pointless)

A BETTER DEFINITION OF INFLATION

With the facts above clearly in mind, we now can offer a better definition of inflation:

“Inflation is the debasement of money by governments and central banks. All governments inflate and destroy their own currencies.  The inflation practiced  by central banks is intentional and continuous. The effects of that inflation are volatile and unpredictable.”  

WHAT INFLATION IS NOT

No amount of government spending can cause inflation. Government spending is reckless and irresponsible and it can lead to bankruptcy but it does not cause inflation. (see It’s Not Biden’s Inflation)

Inflation is not created, or caused, by companies raising prices. It is not triggered by escalating wage demand, hoarding or supply shortages.

Higher prices due to changes in economic demand, hoarding, and bottlenecks in the supply chain for goods and services have nothing to do with inflation.

STOPPING INFLATION 

The Federal Reserve is trying to manage and control the effects of inflation which it creates. The cumulative effects of that inflation are becoming more volatile and more unpredictable.

Inflation can be stopped by stopping the debasement of money, i.e., stopping the expansion of the supply of money and credit.

Of course, that will not happen. There are two reasons why not :

  1. There would be no money to fund the government’s reckless spending habits.
  2. There would be an immediate crash in the prices of all goods and services, investments, and financial assets; followed by a full-scale depression lasting for years.

The Federal Reserve along with its primary dealers guarantee that the US government will never run out of money. Whatever amount of Treasury Bonds aren’t placed with investors and foreign governments are held by the Fed and its cadre of primary dealers.

If that promise were broken, the government (United States Treasury) would not be able to continue issuance of Treasury securities at their current pace, if at all.

Also, the world’s population would not stand for it. Withdrawl from inflation and its effects would be as bad or worse as that experienced during withdrawal from drug addiction.

PREPARE FOR THE WORST AND HOPE FOR THE BEST

Inflation is created by the Fed. The US government and the entire economy of the world is dependent on it.

Because of that dependency, a certain amount of inflation is absolutely necessary to maintain financial and economic stability.

Things will get very ugly, though. More recessions, another Great Depression (see A Depression For the 21st Century) are inevitable.

The worst effects can possibly be postponed, but for how long? Maybe things aren’t so bad right now.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

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Kelsey Williams has more than forty years experience in the financial services industry, including fourteen years as a full-service financial planner. His website, Kelsey's Gold Facts, contains self-authored articles written for the purpose of educating and informing others about gold within a historical context. In addition to gold, he writes about inflation and the Federal Reserve.

Kelsey is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED! 

Kelsey Williams is available for private consultations, public speaking, and interviews at [email protected]

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