Also I’m an Actuary, so basically IQ 500, I’m sure I can figure this out myself.
Here’s my brainwork so far, please comment if any of these seem dubious:
Inflation is defined as a general increase in price relative to “something”. Usually, this “something” is a constant. For example, in a bartering system, inflation means very little, because when all things are more expensive relative to a certain product, people would just stop using that product to barter, negating the inflationary factor for that product. However, in the modern world, we can’t just switch away from “money”, thus, we have inflation with respect to money.
There are two reasons why we have inflation with respect to a medium of exchange. One is the demand of it, the other is the supply of it. If there is limited supply, such as gold, then when the economy grows (people are making more shit from raw materials), there simply is not enough gold in the economy to facilitate exchanges. Two things happen: the value of gold skyrockets, or people start bartering instead. This is the opposite of inflation: deflation. If the economy shrinks (people stop making shit), then gold becomes rather useless, AKA inflation, and some people might also revert to bartering. In general, both inflation and deflation depletes the usefulness of a medium of exchange.
With paper money, we have less of an issue, as we can print more money (or burn money, if you will). Thus when the economy grows and the value of money also grows as a result (due to higher demand for it and the same supply), we can hold the value of money constant, by printing more money to offset the growing economy. If for some reason we accidentally print more money than the economy is growing, then the value of money starts the shrink.
The job of the Fed is (supposedly) to closely monitor the growth of the economy, and print money EQUAL TO such growth. No more, no less. Any other reason should warrant concern.
Not just little, inflation doesn’t exist in a bartering system. Inflation is the reduction in the amount of stuff (some static basket of goods) you can buy with a given amount of currency through its devaluation.
It’s usually thought of us short term versus long term. In the long term all the noise of the business cycle balances out and any inflation is just due to the increase in supply of the currency. Gold is a bad currency because the supply is constantly increasing simply based on people mining it up, regardless of whether that’s helpful or harmful to the economy.
In the short run inflation is impacted by all sorts of things and it’s very convoluted and difficult to predict (the Fed gets it wrong constantly, as evidenced by current events). But one of those could be if people all feel wealthier for xyz reason, even with the same amount of money in circulation they might start bidding up the price of a limited supply of goods, increasing everything’s price. In theory if the total money supply is unchanged though eventually that will come back down (through deflation. Deflation isn’t just the opposite of inflation though, because if you think the price of something will be more tomorrow then you might buy it today. If you think deflation is happening then it’ll be cheaper tomorrow so you’ll hold off and it becomes a vicious economic cycle that is very hard to come out of.
The value of money doesn’t increase because the economy grew, per say. But you might need more dollars in the system just to keep the gears lubricated.
If you have some time, I think this is a good primer on a lot of these topics. It’s also got some other topics that aren’t related which you could skip.
wiki is also a good source. It’s free, and it MUST be correct.
Simplest answer: the Fed was created so that the government wouldn’t get overthrown by idiots… (now, that worked well for 107 years…) … and take the wealthy’s wealth.
One thing that keeps the idiots happy is no inflation, low unemployment, etc. So, for the past 40 years or so, the Fed’s goal is to keep idiots calm by keeping inflation low and unemployment low.
That’s it.
Because, why does a Fed exist? There wasn’t one until 1913. Why does money exist? (It makes for easier transactions, for idiots.) Why is Gold valuable? (Besides, “because idiots think it is” I’m at a loss), Etc. These are basic questions people (idiots who want to learn) should ask.
(“Idiots” short for “idiots with weapons.”)
I do have an Econ degree, but from a shitty college filled with professors who were bitter that they didn’t work at one of the better colleges in the SoCal area.
inflation is 90% psychological. If people think prices will be higher in the future, they’re more apt to spent now. This heats up the economy and causes more inflation. Vicious cycle and only way to stop it is to cause a recession
