How inflation works.

The concept of inflation and how it works is not clear to many people. And there is a new phenomenon to understand: how statists try to hide it.

Let's start with a hypothetical example so the pure concept can be grasped. Let us take a hypothetical County that is sovereign and issues its own currency: 2 million Talents. The people accept the currency and soon the wages and prices of everything adjusts. There is a problem though: the currency is inconvenient, because the change is difficult to handle. For example, how do people deal with items that cost only a fraction of a Talent? It's difficult. So, the County Council decides to issue a new currency called Dollars. For every Talent turned in, the Bank of the County issues ten Dollars. People are told to adjust wages and prices by a factor of ten. So, prices go up. Is this inflation? The answer is NO. Why not? Because the relation between currency and what it buys remains the same. The ten Dollar you got for one Talent buys what one Talent used to buy.

Now, suppose that the Council is taken over by people voted in by the poorest citizens, who want free education, free health care, free lunches for their kids and so forth. To pay for their promises members of the County Council decide to print another twenty million Dollars to spend on new programs. This makes for forty million dollars total currency. Is this inflation? YES. Why? Because there is more currency without an increase in goods, so the County in fact acquired half the goods and services of the County and the citizens lost half of their property.

The response to inflation is an attempt by the citizens to increase the price of their goods for sale and the wages they get paid.

How about the County Council? If the Council imposes price controls, it will in fact create a Black Market and goods will become scarce and difficult to buy. If the Council does not try to control prices and wages, it will have to issue more currency to keep its promises.

There is a new method for the government to keep prices and wages in check: create a Depression. This is done by instituting the so-called 'mark to market' accounting. The County Council declares that there is no market for houses so the mortgage held by the Bank of the County is worth zero. Commerce pretty much comes to a halt. The County Council issues credit to the Bank of the County so it can keep the economy going. By reducing economic activity, the EFFECTS of inflation (i.e. higher prices and wages) are not seen.

If the citizens remain in the dark as to what is causing the Depression, the Council can keep in power and dole out currency so the citizens do not starve. Inflation now is hidden, but it is there nonetheless. How do we know? Because citizens of other Counties know about the cheapening of the DOLLAR and the value of the DOLLAR with relation to other currencies will decrease. You can see how the Socialists decreased the value of the US dollar with relation to gold. You see, gold has an intrinsic value, which equals the cost of producing it. Ths Socialists in fact had gotten the value of the increase in productivity and spent it on their schemes to buy votes.