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Inflation / Free-Market

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Reginald Diepenhorst

When I share something about BIG or EMS there is always a lot of hassle with Inflation. Yesterday someone replied that the BIG in Swiss would cause hyperinflation. I reacted to this = showing I didn’t understand it that well.

I went to search for some information about inflation as to ‘When does inflation occur’ and ‘When not’?

I came across this article: http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/

My only understanding about inflation is what I have learned from high school: “When people press too much money it causes inflation”. Yet.. I couldn’t see how a BIG or EMS would actually cause inflation.

In this post I’d like your perspectives.

When reading the article I am left with the following pointers:

The BIG does not create inflation per sé. It would only create inflation when the money is ‘created’ (thus pressed) and if you actually get the money from let’s say profits from companies: There should be no inflation. As the amount of money that is exist is the same, though it can now be spend my more people.

The only way it can create inflation is when companies start charging more for their products. The problem of inflation then lies with the companies and the free market as in how much they may charge and is not a direct result of the BIG. It just exposes the power companies have.

To make this more practical. Let’s say: We give free rent housing now to everyone. This in itself is not causing inflation, though the people DO have more money to spent. The only way inflation then can occur is when these house-owners (to whom one pay the rent to) decide to Ask more money than they initially did. Thus this would require a maximum freedom of a price that can be asked to prevent abuse.

I see that this is a problem to the people who believe in a Free market which is just another word for: Free Financial Abuse or Free Range of Profit Margins.

Thus bottom line:

BIG does not create inflation on itself when it’s backed up by money that already exists.

Now where I find difficulty with is the point that if money is created by banks and how it exactly does create inflation. What I have read in the article and understood it correctly… inflation should only occur is the printed money is higher than the demand of money. Yet I cannot grasp the point of ‘Demand’. Like I know there is a demand for money, so how does 1+1 add up?

Another point I find difficulty with is that I’ve learned that money should always be backed-up by something. And I still have the understanding that it’s gold. Though I have ‘heard’ that if we add up all of the money that currently exists within this world, does not equal the amount of gold, thus ‘what is it back upped by?’.

If you say like: Well it’s not back upped by anything, and that’s why inflation actually occurred, then Why has this not been repaired or is it in repairable?

Is someone able to explain this to me and show me whether there are some ‘assumptions/misconceptions’ here?

And then if it’s true what I said in the first part, how can we common sensically show that the ‘free market’ then is the problem and should be adjusted in relation to the ‘inflation point’ and the solutions we really have for this?

Thanks!

I have listened to https://www.youtube.com/watch?v=JZo_NE2lD08 which gives a clear perspective on inflation too and how it occurs. However I still i am not clear on some of the complexity of our Current system.

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Scott Santens
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Yogan Wayra Zadronzny Barrientos

I certainly recommend Scott's link. So in my reply, I have one goal, to make this simple. So my understanding of inflation is simple. I can speak and explain things in complex ways, but I rather explain the same thing but as simple as possible so that everyone can understand. So this is my explanation of inflation.

So what is inflation? The best question to ask first is what is money?

Money is a value. A chocolate bar can cost 1 dollar, 1 yen, 1 euro. The next year the price can increase to lets say 2 dollars, 2 yens, 2 euros, for example. The question is why? Why does the same thing, a chocolate bar, cost more one year than the next. Well, first of all the company/vender makes the decision to charge more. This is true for anything you sell, some person has to decide to charge more. So throughout the years, people/companies/businesses made the decision to charge more. This should be clear. So the question to ask next is why are people/vendors/businesses deciding to charge more? There can be different reasons. One of them can be inflation, but it can also be for other reasons. I'm sure you can think about some reasons why a businesses would want to charge more. The basic reason is to make more money. The same is true for inflation. If a business didn't increase its prices to match inflation, it would actually lose money. This is important to emphasize. A business will lose money if it doesn't increase its price to match inflation.

Now the question is what is inflation? You can already see, an inflation is something you have to react/respond to, otherwise you will lose money. Now I want you to imagine that every person on the planet is their own business. I want you to imagine that the money a person earns, is like their business is making a profit. Now I want you to imagine a person that has saved $10,000 (or euros or yens) and keeps that money in his savings account. Lets pretend he simply sits and wait and does nothing. He doesn't need to eat, drink, or need to spend money to purchase anything of any kind. He simply has 10,000 in the bank. How will inflation effect is money, and when does inflation occur?

I want you to imagine a world where no debts exist and no idea of credit is thought of or ever heard of. You only buy with the money you have now. Ok? Can you picture it? So in this world, you can only receive money, by earning it. You cannot borrow money. I also want you to imagine no one dies, and no one is ever born. This is actually a world without inflation, believe it or not. Inflation occurs in a world where money becomes either too scarce or too plentiful. In other words, whenever the amount of money changes. In our example lets say if you took everyone's money in the world and added it up that it would equal 10 billion dollars. This is a fixed amount. Can you imagine scenarios that would to a change in the amount of money available? How about if someone destroyed money, by burning it? Let's say people started burning their money, this would mean there is less money right? The same happens, if you were to bury money, or if you hide it. In all three cases, burning, burying, and hiding it, the amount of money available will lessen. There is a slight difference, because burning is more permanent, while burying or hiding can be undone. But the effects on the amount of money available right now, would be the same, believe or not. Everyone in the world decided at the same time, to hold onto their money, and not spent a single cent, then business wouldn't earn any money, so they wouldn't be able to pay their employees. Customers wouldn't buy anything. In essence, the economy is dead, simply because money is not moving. Let's imagine another scenario. Let's say 90% of the money is destroyed, either by accident or on purpose. Would the value of the money change? What do you think? If you only had 10% of the money you have now, would it seem more valuable to you? My intuition says yes, because you have less of it, and money is overall more scarce. So 1 dollar, or 1 yen, or 1 euro will increase in value or purchasing power. That is why you hear stories of how much cheaper things were 100 years ago, meaning you could buy a cup of coffee for a nickle (5 cents). The money supply, believe or not, was much less 100 years ago.

So how does all of this relate to inflation? Well, inflation and deflation expresses the concept of when a money's value changes, so it will either increase or decrease, which has to do with the scarcity or the amount of money. It makes intuitive sense. The more plentiful something is, the less valuable it is regarded. So when all the farms started producing more food at the turn of the 19th century, the less food cost, and the less customers had to pay to buy food. So I hope I have made sense so far. With this we have the basic knowledge to analyze whether basic income would lead to inflation or deflation, and thus change the value of money. So the only circumstance that basic money (or anything) can cause inflation or deflation is if it causes a change in the amount of money available or in circulation (that is the very definition of inflation or deflation). If basic money were to be issued or printed money it would lead to inflation. This may not be so bad, because governments today regularly print new money to increase the money supply, to help their economies. The Federal Reserve in the US does this. However, if basic income were to be funded by ANY other method that doesn't involve printing money, it is frankly IMPOSSIBLE to lead to any inflation. Because where the money comes from will be from WITHIN the system and the current money supply. Makes sense?

A small note, it is good to know that increases or decreases in the size of population leads to inflation or deflation, because money becomes more scarce in the hands of more people. Makes sense? So this is good to know because that means as our population increases, we should be printing more money anyway. But governments don't do that enough.

So this has been my basic explanation, hope this helps!

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Leila Zamora Moreno

Hey Reginald,

Scott's article as well as Yogans story should have given you a pretty good picture of how to approach inflation, so I will address the other points.

What may add to your confusion is that often, the ‘demand for money’ only refers to someone desiring their assets/wealth to be liquid in contrast to holding it in the form of bonds, stocks, property etc. So there what they are looking at is whether people want flexibility and so liquidity/cash – or hold more static assets which are harder to turn into cash but which provide the holder/owner with a return (like interest for example) or protects them from inflation (as their nominal value will increase with inflation, keeping the real value intact). So they are not looking at whether you 'want money' but how you want the money you already have (cash or not?).

In a way, it would be hard for traditional economics to ‘explain’ the demand for money as what you think the concept would refer to, because then you’d be asking how much someone is willing to pay to have money – which doesn’t make any sense - as you then 'need money' to show that you want money; while obviously those who don't have money want money. In a way, this illustrates how the whole concept of demand in economics currently should be taken with heaps of salt, and is completely inadequate in providing a system for determining value.

The gold standard was abandoned during the wars, as many resulted to printing money to be able to finance the wars rather than being limited to the amount of gold reserves being around to finance the war. This then destabilised the whole system leading to its eventual failure.

There’s a lot of outrage and criticism about how our current money is a ‘fiat currency’, which means that it isn’t backed up by anything (like gold) but functions only based on trust/agreement that this money is ‘worth something’. Though, if you have a closer look: even if money is backed up by gold, it is actually still a fiat currency, because you are backing up one substance/material with another substance/material, which we have agreed has value (like gold). So whether the money is ‘backed up’ by gold or not, is really not that big of an issue.

Yes, there were some plus points at having the money be backed by gold, as there was a bigger sense of unification whereas we are now dealing with lots of currencies and volatility, which opens a door to greater destabilization. It also forced a restriction on how the money supply should be managed, as there’s a direct link between the amount of gold around and the amount of money in circulation; and so keeping prices stable. Yet here we have to realise, that these ‘effects’ are not only inherent to backing one’s money with gold – but can also be achieved by sheer decision-making and will-power (meaning, just because you can mess around with the money supply doesn’t mean you should. The gold standard forced caution, yet we can enforce caution without needing to link our money to gold, it's a management decision that needs to be made, and then be sticked to).

So returning to the gold standard is not really a solution. If you look at it, it’s kind of arbitrary to want to back up money by something like gold – and allow that to determine the value. The amount of gold around has no relation to who/what needs money. So what makes more sense is to have your money supply for instance be directly related to population levels, as in the end money is about serving people/life and not gold; as that which makes money valuable is the extent to which it can support people and provide them access to life-enabling resources.

For money to work, it needs to be managed practically and responsibly, no gold necessary, – which is exactly what is lacking in how it is currently being managed, and why we propose a Living Income Guaranteed.

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Darryl Thomas

I want to share a snippet of an interview I listened to recently which deals with this gold standard subject as it gives an easily understandable account of the nature of money as well as some startling implications of the fact that nations have long had the capacity to make life heaven on earth for its citizens but instead chose to enrich themselves and their allies. And we've allowed corporate interests to drag ourselves into the jaws of an economic nightmare for far too many. It proves that a living income for all can be easily instituted. We just have to get more people hip to the fact that this world can be different.

HARRY SHEARER:  So let’s start at the beginning. What’s money?
STEPHANIE KELTON:  Well, money is a relationship that exists between two parties, and it signifies a party who is the debtor and a party who’s the creditor. So money is a balance sheet relationship where you’ve always got both sides of the balance sheet at work. You know, somebody’s asset is somebody else’s liability. Somebody’s IOU is somebody else’s balance sheet asset.
So money isn’t this thing. We tend to think of money as a thing, something that you can pick up, something that exists in physical form, and there’s only, you know, so much of it. Or if there isn’t only so much of it, most people think there should be a limit. And really, in the modern era, money is something that we create with keystrokes. We use computers. When you walk into a bank and you sit down with the loan officer and you say, “I’ve got this plan for a small business I’d like to start,” or “I’d like to expand my business,” or “I want to buy a car or a computer or pay for school” or whatever it is – the loan officer doesn’t get up from the desk and say, “Just a second. Let me go and find out if we have any money we’re lending out today.”
HARRY SHEARER:  (laughs)
STEPHANIE KELTON:  That doesn’t happen. Right? The loan officer doesn’t look in the vault to find out if they can make the loan. They look at you, and they look at your work history and how much you make, how long you’ve been there, what kind of debt you have. You know, they look at your balance sheet, not their balance sheet. And if they think they can make money by extending credit to you, then they simply use the computer. They credit your bank account. You get money and they get this asset called a loan.
HARRY SHEARER:  Or in the last decade they didn’t even look at you.
STEPHANIE KELTON:  They didn’t even look, right.
HARRY SHEARER:  Yeah. So did – your point of view is that this changed when the United States and ultimately a lot of other countries went off the gold standard and money ceased to be a representation of something payable ultimately by the provision of certain – you could always go and demand certain precious metals for your piece of paper?
STEPHANIE KELTON:  Right. Right. Exactly. So before 1971 the monetary system that we had in the U.S. looked very different from the one that we have today. It was based on a system of fixed exchange rates. It was a global monetary system where you had 44 countries participating. This is something that was an outgrowth after the end of World War II. It was called the Bretton Woods system because it was designed and put into place, conceived at a place called Bretton Woods, New Hampshire. And so 44 countries got together and decided to fix the value of their currency, so the Mexico peso would be convertible into so many U.S. dollars, and the French franc into so many U.S. dollars, and the German mark into so many U.S. dollars, and then through the dollar those currencies would be convertible into gold. So a fixed price, you know, $35 an ounce. So you convert your deutschmarks into dollars and then your dollars into gold.
And when you have a system like that in place, of course you have to be careful about how much you allow your money supply to expand, because you’re promising to convert the dollar on demand into this very finite resource called gold.
Well, after 1971, President Nixon took the U.S. off of the Bretton Woods system. We don’t have this old archaic gold standard convertibility currency system anymore. We have what’s sometimes referred to as just a pure fiat money system. It’s – our money isn’t backed by anything physical. It’s not convertible on demand into any other country’s currency or into any hard asset or anything like that. We quite literally can have an infinite supply of U.S. dollars. Okay? There is no inherent limit to the amount of currency that can be created in the modern era.
And this isn’t, you know, a crazy idea that I dreamt up. This is something that Alan Greenspan has been really candid about. And he’s said it over and over again. You can find the videos, read the testimony. He says quite plainly that there is no limit to the government’s capacity to create the currency.
And that’s why all of these, you know, these debates that you hear about, all this hand wringing over the size of the national debt, and what if we can’t pay it back, and the rating agencies, and what if the U.S. defaults on its debt, and all this, and Greenspan comes out and he says, “This is ridiculous. The debt is denominated in the U.S. dollar. The U.S. dollar comes from the U.S. government. We always have the ability to pay the debt, always.”

Full transcript link: http://harryshearer.com/transcript-stephanie-kelton-interview/

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