WHAT EXACTLY IS INFLATION?
by Stefan Grieb
March 26, 2007

Before getting started, This piece is my understanding of what inflation is, as taught by all the writers from the various WEB sites. My issue is with the standard explanation. That explanation being, "too much money chasing too few goods", left me thinking. Huh?!! Eventually, after reading it from multiple sources, the idea finally sank in. And I hope I got it right, certainly don't want an enraged Mogambo at my door ready to take my head off, if this is wrong. This is the way I try to explain it to family and friends.

In my humble opinion, another way to understand inflation, is from a basic picture conceptual level. Look at it in terms of a glass of water. The first thing to establish is, what does the glass itself represent?

Consider this: The glass represents just about anything and everything for sale. Mostly, this will be just about anything you can touch, although I took the liberty of lumping services in as well. To me everything is related in an inflationary sense. It only matters to what degree a price will rise, whether it’s something you can touch, like a loaf of bread, car, wrench, toy, or even a service, such as a real estate appraiser. Everything is interrelated in some way. The point is, if you can buy it, regardless of what it is, the glass will represent it.

( Some folks consider currency money, but that's not really true. There is a difference.)

Now place some water in the glass, and think of the water as currency. As a matter of fact, it just so happens that the amount of currency represented by water in the glass, is what is required for the purchase of all products and services at the moment. ( products and services which is represented by the glass)

And where did this currency come from? It was created by the Federal Reserve, courtesy of their money creation mechanism. It should represent a certain store of value. A certain amount of money is necessary for the purchase of goods and services. That would be a good thing. So the Fed is responsible for the creation of this currency that is used for the purchase of all products and services. ( Yes, I'm using money and currency interchangably. There really is a difference.)

The level of the water in the glass represents the price of goods and services. That part is real important to see. All products and services cost something. You can’tgo into a store and get stuff for free. After costs are established, a price is assigned to whatever stuff you want to purchase. All products and services have costs associated with them, and that, helps establish the price to you. So, the level of the water in the glass represents the price you pay for goods and services.

Now, let us finally consider the role of the Federal Reserve. The very nature of the Federal Reserve is to create inflation and manage inflation expectations. The Fed presents the illusion they are fighting inflation, but their whole purpose in life is to inflate the money supply. The Federal Reserve will also try and present the illusion of a healthy economy. A healthy economy looks like growth with steady costs and low unemployment. The Fed accomplishes this slight of hand with deceipt and grossly manipulated statistics and indexes. (Example: News reports that the ecomomy is strong and wages are up. Consumers are confident, and inflation remains contained.) All of which is a huge fraud and cover to continually inflate the money supply. So let us examine the effects of the Federal Reserve adding liquidity or more currency to the money supply, ergo inflation.

The Fed adds liquidity. But now look at the level of water in the glass!! The level has risen! The price has risen! The glass still represents all products and services that can be purchased with currency. The products and services did not increase. They�re still the same products and services, but more currency has been added into the money supply. Something changed. What changed is, �the price of products and services.� They are now more expensive. But they are only more expensive, in terms of the currency you are using. In this case, it would be the dollar.

The product or service is not really more expensive. The currency or dollar has been devalued and is worth less. More currency is needed to buy the same thing, because every dollar in your wallet is worth just a little bit less. This happens every time the Fed creates more currency. The amount of products and services remain the same.

If there is more currency in the economy, eventually, it has to work its way into pricing. All prices rise until the whole issue between products, services and total money supply, gets balanced out. And that is inflation from my very basic point of view.

Stefan

© 2007 Stefan Grieb

Contact Information
Stefan Grieb
Staten Island, NY USA
Email