Teton Valley Tea Party

The True Cause Of Inflation
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Hyper-Inflated Zimbabwe Money
pic from http://therealrevo.com/blog/?p=5624

Inflation - Webster's definition: act of inflating;... over-issue of currency, tending to cause a general rise in prices.

The federal government would have you believe that understanding the topic of inflation is pretty much impossible, even if you do have a doctorate in finance. This is one of those dirty little secrets they don't want you to know. Understanding inflation and what causes it is actually not complicated. What follows is not my own story. I learned it at a lecture during my seminar with the National Center for Constitutional Studies. So, put your faith in their understanding of this, not mine.

The key to learning the secret of what causes inflation is in the statement, "All the money buys all the things." I have a little story for you...

The Micro Economy

shells.jpg - 12971 Bytes Once upon a time there was a tiny desert island in the South Pacific with a micro-economy. There weren't lots of things on this island. In fact, they only had 10 things. As the islanders hadn't ever heard of paper money, someone got the bright idea to use a rare sea shell they had found on the island as a medium of exchange. After scouring the island they found 10 of them. As 'all the money buys all the things,' after the islanders got to trading and the dust settled (meaning things had found their own equilibrium), they found they could trade one sea shell for one thing; a sea shell is what a thing cost.

It was about now that a hurricane came through and ruined 5 of the 10 things. This would have thrown their 'one shell buys one thing' out the window except one of the islanders was able to acquire five of the shells and hid them away for a rainy day. So, even though there was a total of 10 shells that had been found on the island, only five shells were in circulation. They still have 5 things so a 'thing' still cost one sea shell. You still with me???

As time passes, the islanders build 5 more things and found 5 more sea shells. So, we were back to 10 things and 10 sea shells in circulation. So, a thing is still costing 1 sea shell. Yes, our one islander is still hoarding his 5 sea shells. His hoarded shells were still technically worth 5 things as that was the going price. But as he was a hoarder, he didn't do that. He just kept them. As far as the micro-economy was concerned, they didn't influence the economy.

One day, the boss was visiting a more remote part of the island. He moved a piece of drift wood and to his amazement he finds 10 more of the rare sea shells the island is using as currency. He thinks this is great! "I should be able to buy 10 things with all these shells," he thought.

And so he put the 10 new sea shells into circulation. So, now there were 20 sea shells in circulation, but only 10 things. The boss starts buying things like crazy. After some time, however, as the islanders like to trade their things back and forth often, the dust finally settles and each thing is now costing 2 sea shells (again, all the money buys all the things).

Slowly the islanders made more things. In fact, they made 10 more things. So, now there's 20 things and 20 shells. After the dust settles, the price of a thing has again settled out at one sea shell. Finally, things on the island were again back to normal. All the money buys all the things.

That's the end of the story. Now, it's time to ask some questions:

  • What in the heck happened??? (The money supply was increased.)
  • Did the value of the goods on the island decrease? (No, we still have the 10 things. They haven't changed nor has their value changed. The islanders still want them as much as they did before.)
  • Well, what did change then? I mean, things are now costing twice as much. (See the answer to the first question - the money supply was increased.)
  • I still don't get it! (It's not the value of the things that changed. The islanders still wanted them as much as they did before. The things are holding their value. But because there's twice as many sea shells now, they only have half the purchasing power they originally had. Yes, each sea shell could only purchase half of what it used to.)
  • Ok, I'm starting to get it. Hey wait a minute! I can't believe that half the value of a sea shell can just disappear into thin air! What happened to all that value? (You aren't quite getting all of it yet. Half the value (and wealth, I might add) of the original 10 sea shells in circulation before the boss's big find went to the boss who introduced the extra 10 sea shells.)
  • I almost forgot about the guy who was hoarding the 5 shells. Does he still have his 5 shells? (Yes.)
  • Hey, wait a minute! He can't buy 5 things with his 5 shells anymore, can he. (No.)
  • As the going rate is now 2 sea shells for a thing, he can only buy 2 1/2 things with his hoarded shells. (You're catching on!)
  • Then, half the value of his hoarded sea shells also went to the boss? (Yes.)
  • And if he put his 5 horded sea shells into circulation, that would further inflate the money supply, wouldn't it, because he's adding it to the sea shell supply. If he had forever kept them out of circulation, it would have been like they didn't exist. They were no longer part of the sea shell supply. (You've got it now.)
  • One last question regarding the now 20 shells and the 20 things. How does that work, anyway? (For things to cost the same (inflation to remain at 0 percent), the money has to increase or decrease at the same rate the things increase or decrease. (...something about that being in balance with the 'gross domestic product'...) It's the congress's job to keep this in balance, not the FED.)
So, this should answer bunches of real-life questions, like...

  • Who inflates the money supply? (The US Government through the organ of the Federal Reserve Bank. The US Government runs the printing press. But it's a lot more simple than that, now with computers and wire transactions. They don't even have to print it anymore.

    For example, I do most of my purchasing with a debit card. When I buy something I just use my card and the financial transaction takes place without me ever digging paper money out of my wallet. It's the same way coming into my account. I have 'check to bank.' It's electronically transferred into my account and then out again. I'm guessing of all the money I spend, maybe only 1% of it is done with paper money. And almost everybody is doing the same thing! Some might ask if there's not paper money sitting in some bank vault somewhere to cover all of these electronic transactions? All I can say is, "Are you kidding? That would serve no purpose." The Federal Government took us off the gold standard in 1973. It would be pointless to have a "paper standard."

    Of all the US dollars floating around in the world economy, there's just a small amount of it that's in paper. Paper money is fast becoming antique. Never mind the US going off the gold standard (which I might add is against the constitution), now we're going off the paper standard as well if there ever was one. Now, much of our money has been reduced to electrons bouncing between computers. The federal government can easily inflate the money supply without ever printing a single dollar.)

  • I have $10,000 in savings right now. When inflation hits, is the government stealing the "value" of my money out of my account without ever touching it? (Yes. But it's just not the money in people's savings. It's all US dollars everywhere. When the government inflates the money supply they are stealing wealth from everyone that has dollars. It's a hidden tax the government doesn't want you knowing about.)
  • Hang on here. You're kidding me. I've been told inflation is figured by rising or lowering costs. (True. Inflation is now figured by how much things cost, minus energy and food costs. (They don't like to include those two things as they are volatile.) But that's not what causes inflation, although it is what the government would have you think. Inflation is caused by increasing the money supply.

    Let's say the price of gas does go up. For there to be balance in the US monetary system, if the number of dollars remains constant, if one thing goes up, something else must come down. After all, there's only so much money to go around and then it's gone. In such a case, as prices stabilized with the higher energy costs, and other things decreased in cost, inflation would remain at zero. All the money buys all the things.

    I just as well add here that the government also tries to hide how bad inflation really is. As already mentioned, they'll say that oil and food are not included in the inflation index as those two items are so volatile. But if you are going to accurately figure for inflation, you have to include all the 'things.')

  • How bad does inflation actually hurt us? It's only 2 or 3 percent a year but has varied a lot. (Actually lets look at it. Two or three percent a year doesn't seem very high but at that rate what would it be over 10 years, 20 or 30 percent? Lets look at the actual numbers over time. Over the last 10 years inflation cut into the greenback 28 percent. ...20 years, 73 percent... ...30 years, 195 percent... ...50 years, 637 percent. Generically, what cost a dollar in 1959 cost $7.37 in 2009. ...97 years, 2067 percent. That's a huge hidden tax!

None of this would be happening if the dollar was backed by gold which would force the federal government to not print more dollars than they had gold in reserve to back it up. This is mandated by the constitution but is now being ignored. The days of making dollars out of thin air would come to an end.

The Federal Government knows they can only tax us so much, after that we'll rebel. (If there wasn't tax with-holding, we as a people would have rebelled a long time ago if we had to mail in our tax check every month.) Aside from going further into debt, it is not beyond the federal government to just 'print up' (I use that term loosely) a little money to meet the shortfall.

One last thought here. We should be able to determine by the inflation rate how much money was created by how many total dollars are in circulation. From what I can learn on the web, in the beginning of 2008 there was about $830 billion in paper money. The majority of that is over seas. What about the rest of it that's not printed on paper? I'm not sure too many people know. I've seen numbers from $15 trillion to $65 trillion in my research. If you do your own research on this through the search engines, the key word here is "circulating," which means printed money moving around. Think I'm nuts? (Well of course I'm crazy but that's beside the point.) Here's a tiny bit of evidence the total dollars that are everywhere are far more than the printed money alone. Total dollars are in the trillions. What's the national debt? Right now, over $13 trillion and climbing fast. As it's a financial debt, the money has to exist! So, using those two outside numbers ($830 billion for just printed money and $65 trillion), with a 2008 inflation rate of 3.8 percent, between $31 billion and $2.4 trillion new dollars were created around that time. (The higher number is more believable than the lower number as it's blatantly obvious there is more than US$830 billion floating around in the world financial system.)

My math's faulty here as I'm comparing apples to oranges. The official inflation rate is figured by how much prices actually rise (not including energy and food costs). I calculated how much new money was created by using that figure to expand the money supply to that percentage. The number of new dollars could actually be much higher as 'the dust is just beginning to settle,' and has not even begun to settle with all the bailouts that haven't filtered their way down yet, and might not for a while in this recession. Internationally, the US dollar isn't doing as well. See http://www.traderslog.com/quotes-charts/?sym=DX!&studies=VOLI;&a=M to see how the US Dollar is doing against other major currencies. It's down about 30 percent against other world currencies since 2002. I think part of the reason is our currency is being inflated faster than their currency and the world's growing lack of confidence in the US dollar.

However much it is, it is a huge amount of money. The total revenue the government is taking in from taxes is $2.1 trillion this year. That extra trillion or two from inflating the money supply must really help out! But is our government getting it? What is the organ that's actually inflating the money supply? It's the Federal Reserve Bank. Are they giving it to our own government or are they passing it out around the world wherever they want?

There's small chance that question will ever be answered.

See Glenn Beck's answer to this topic.


Probably the most well-known period of hyperinflation happened in the Weimar Republic of Germany in the 1920's. One story is told of a man who took his wheelbarrow of money to the grocery store to see if he could get a loaf of bread. When he went out to get it, the money was laying there on the ground. Someone had stolen the wheelbarrow! A year or two before, people were desperately trying to find something to buy which would hold it's value. One guy bought a railroad car full of bed pans. Another guy bought a shipment of old wine bottles. It turned out good for him as he made a fortune after the new, stable money was put into place, by selling his old bottles to the wineries before the bottle manufacturers got going again.

Youtube video of the Weimar hyperinflation.

Peter Schiff is worth listening to regarding today's economics. Taking huge ridicule, he's the only economist who correctly forecast the present recession we now find ourselves in. See what he says is in our future regarding hyperinflation. This is a Must Watch! There are other Peter Schiff youtube videos on this subject as well if you'd like to search for them.

This is an Argentinan Hyperinflation story. Ahemmmm, this link only displays correctly with Microsoft Explorer's browser.

The dollar bubble on youtube.

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