WHAT CAUSES INFLATION?

Post #97

Presently, consumer prices are increasing by about 7% per annum. If prices continue to grow at the present rate, the inflation rate after 12 months will be 7%. At this rate, it will take about ten years for prices to double according to the rule of 72. Divide any incremental increase into 72, and it approximates how long it will take for the value to double. However, we are at the very beginning of an inflationary spiral that could easily be in the double digits soon. If consumer inflation is ten percent per annum, prices will double in only seven years. Producer prices are currently increasing by 13% per annum. At this rate, producer prices will double in just a little over five years. Producer prices are a precursor to consumer prices as the producers pass on their increase in costs to the consumer.

Commercial banks can multiply money, but only central banks can create money. Before the commercial banking system can multiply money, someone has to make a deposit. But the Federal Reserve does not need a deposit; it can generate money by merely pushing a few keys on its computer to credit a client’s account by X amount. All currencies are debt instruments; they are floating abstractions that profit the world’s bankers. At the top of a dollar bill is printed “Federal Reserve Note.” A note is an IOU; it is an agreement to pay interest to the Federal Reserve. Dollars come into existence when the government sells bonds to the Federal Reserve. Therefore, we pay interest to the bankers. The Bureau of Engraving and Printing converts only a tiny fraction of this borrowed money into physical dollars.

Inflation is always a monetary phenomenon. Inflation is always caused by the Federal Reserve increasing the money supply more than the economy increasing goods and services. Economists use the formula MV = PQ where M stands for the money supply, V stands for velocity (how quickly money changes hands from person to person), P stands for the price level, and Q stands for Gross Domestic Product, (GDP). Now using a little algebra, P = MV/Q. So the price level is determined by the money supply times the velocity of money, divided by GDP. If MV goes up, prices will increase. If Q goes up, the price level will decrease because goods and services are more plentiful.

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Published by Kenneth E. Long

Author, college professor of economics, swimming and tennis enthusiast

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