Laws of Inflation

If a new invention makes society more productive, deflation will occur because the same amount of currency will buy more things.  If there are more goods in society being chased by the same amount of currency, prices will decrease in order for goods to attract buyers.

Our experience during the past 40 years has been exactly the opposite, as prices have risen.  Electricity, electronics, and computing have made society far more productive than we were 150 years ago when reading a book had to be accomplished under a candle.  Certainly the amount of things that are available to purchase now, far outnumber the amount of things that were available to purchase 150 years ago.  Thus, we should have experienced massive deflation as the amount of dollars chasing additional goods would reduce prices.  But instead, we experienced extraordinary inflation causing prices of goods to increase at substantial rates.

This means that those who saved have seen wealth dissipate over time.  Where did it go?  Well it went to many different places, but one of them is to the banks.  The banks loan money to the people out of thin and at interest.  As that new money starts to flow through society the prices of goods rise and the amount of debt accumulated by civilians also increases.

Since currency is not in itself production, but rather a store of prior productivity, loaning it out of thin air to people at interest does not add any additional goods to society.  What it does is drive the price of all goods up causing the people to require more currency to buy the same amount of stuff.  Who wins, well the banks.  Henry Ford said “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

There is some debate between the Austrian Economists and the Keynesian Economists regarding the proper definition of inflation.  The Austrians believe that inflation properly definition means an increase in the money supply.  The Keynesian believe that the definition of inflation is the rise in prices.

Although one can obviously define a word anyway they like and therefore nobody is right, the Austrian definition is better.  Why?  When the money supply increases the value of dollars in the hands of the people who presently own it diminishes.  Hence, reduced wealth.  However, prices may not always rise when there is an increase in the money supply because of technological advances, or other reasons, to increase productivity.  Furthermore, some sectors may see a rise in prices faster than other sectors.  For example, wages are considered sticky and therefore workers will typically see a rise in their salaries at a slower pace than the increase in the price of goods.

Inflation, no matter how you define it, is a secret tax imposed on the people by the government.  The consequences of inflation are disastrous, but they are not immediately noticeable.