Lesson 9 - Inflation

Lesson 9 Inflation My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.   Trying to understand monetary inflation, and how a non-inflationary system like Bitcoin might change how we do things, was the starting point of my venture into economics. I knew that inflation was the rate at which new money was created, but I didn’t know too much beyond that. While some economists argue that inflation is a good thing, others argue that “hard” money which can’t be inflated easily — as we had in the days of the gold standard?—?is essential for a healthy economy. Bitcoin, having a fixed supply of 21 million, agrees with the latter camp. Usually, the effects of inflation are not immediately obvious. Depending on the inflation rate (as well as other factors) the time between cause and effect can be several years. Not only that, but inflation affects different groups of people more than others. As Henry Hazlitt points out in Economics in One Lesson: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” One of my personal lightbulb moments was the realization that issuing new currency?—?printing more money?—?is a completely different economic activity than all the other economic activities. While real goods and real services produce real value for real people, printing money effectively does the opposite: it takes away value from everyone who holds the currency which is being inflated. “Mere inflation?—?that is, the mere issuance of more money, with the consequence of higher wages and prices?—?may look like the creation of more demand. But in terms of the actual production and exchange of real things it is not.”Henry Hazlitt The destructive force of inflation becomes obvious as soon as a little inflation turns into a lot. If money hyperinflates, things get ugly real quick. As the inflating currency falls apart, it will fail to store value over time and people will rush to get their hands on any goods which might do. Another consequence of hyperinflation is that all the money which people have saved over the course of their life will effectively vanish. The paper money in your wallet will still be there, of course. But it will be exactly that: worthless paper. Money declines in value with so-called “mild” inflation as well. It just happens slowly enough that most people don’t notice the diminishing of their purchasing power. A