All information about inflation

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I feel the need to share some facts about inflation. Usually there is a lot of misunderstanding about
what is inflation, what causes inflation, how it works, what it does and what can be done about it.
Everyone understands that it does exist and that it is felt in all aspects of our lives. Such as the costs of
items going up in price. But many of us don't truly understand what about inflation causes this to
happen. Everyone can remember being told that things have gone up in price since we were younger
but it's important to understand why and what is causing this.
Inflation is all about supply and demand so to understand it you need to look at this from a consumer
standpoint. The item we will use for will be a pencil. As everyone knows a pencil is a common item
which is very easy and cheap to buy in almost any part of the world. It's a known fact that when the
supply of something is low and the demand is high then the value of that item increases. So for instance
if there were only 1,000 pencils left in the world the price of them would skyrocket. More or less when
there is less of something and people want it the value goes up. When there is more of something then
people need then the value will go down.
I will be getting to the point of this part shortly here but now we need to go to something else that ties
into this and what is causing the massive inflation we see today. Back in the day, America like many
other countries were on what we call a gold standard. A gold standard was that my money I have will
backed by something of real world value. Back in the day people used what was known as Gold
certificate's ( http://en.wikipedia.org/wiki/Gold_certificate ) which was basically a form of paper
money with a certain gold value to it. These certificates looked similar to the paper money we have
today.
What this means is that banks were supposed to hold gold equal to certificates issued and if you took
your certificate which was forth fifty dollars down to the bank you should be able to trade the paper
note in for fifty dollars worth of actual gold. All banks were supposed to hold gold and people
personally owned and used gold as well. In this way your money was backed by something of real
world value since everyone holds value to gold. Well first of all in 1913 what was known as the Federal
Reserve came into being. The Federal Reserve System
( http://en.wikipedia.org/wiki/The_Federal_Reserve ) plays an important role in our central banking
system.
Back in the day banks were privately owned and each one was separate from the other. But eventually
it was written into law for one reason or another (which I will go over later) to have one central
banking authority from which the entire money supply is issued and thus the Federal Reserve came into
being. On top of this in 1933 President Franklin D. Roosevelt signed into law that the gold standard
was illegal ( http://www.gold-traders.co.uk/gold-information/when-did-the-gold-standard-end.asp )
which basically made gold ownership illegal for the average person. Also everyone had to trade in their
gold certificates for the federal reserve notes which we use today.
Naturally this made it so that only the government had ownership of gold and no longer had to
distribute it to regular people. The US dollar has become the world reserve currency due to the fact that
it could be traded for a real world item which was gold and the US government could buy or trade gold

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with other countries still. Finally in 1971 Richard Nixon made it so gold could never be traded at a
fixed rate/price anymore which brought an end to the gold standard on a global scale since central
banks could no longer trade or convert gold at a fixed rate.
Now finally this will all go full circle because you see under the gold standard it is clear that the money
had to be backed by a certain amount of real world gold. So you could never give out more money than
you had gold to back it. This is no longer the case anymore. Now when we go back to our rule of
supply and demand it is pretty simple.
When places got more gold they could expand their supply of money. When there is more of something
the value of it goes down. You'll see where we're going with this. Certain items of importance can of
course cause fluctuations in market price as well. Oil is one obvious item. Oil is used for everything
these days so when oil becomes more scarce the value of it must go up. Thus it costs more to buy and
people must ask for money for good and services in return to cover the increased cost of gas and oil for
them. The two things referenced above though are what I call natural inflation.
You see natural inflation is of course when something on a broad scale drives up prices or like we
discussed earlier when there is more of something, including money, the value of it goes down. So
logically the more money there is in circulation a little bit lower the value goes because it is more
common. So far this all makes sense, right? All right, now everything will make sense.
Basically what the Federal Reserve act created the ability to print money which did not need to be
backed by the value of gold. Instead, it was the force of law which said, "You must take payment in
these notes or else." So the value did not come from a real world item but force of law instead. When
you do not have the constraint of having a real world item such as gold forcing you to limit your money
supply then what is stopping you from making money. Well logically, nothing at all. So if my money
does not need to be backed by gold this just means that I can make as much as I want. Which is
basically what the Federal Reserve does. They practice what is known as Fractional Reserve Banking
where whenever a bank or anyone needs money they can simply print it up and give it out.
Now think about it we already know that if you apply our pencil idea to money then the more money
there is circulating the lower the value of it is. So basically the real cause of the inflation we deal with
today is not that the price of things is going up but that the value or our money/currency is going down.
By having the supply of money not just outpace demand but far outpace demand the value of the
money goes down. And that is the simplest explanation as to what modern day inflation is. Our money
is no longer backed by real world value, instead being backed by force of law, so whenever the Federal
Reserve needs to give out more money than simply generate it or print it up. You can see the problem
with having no constraint at all in creating something supposedly of value from thin air. After all just
think about how much money you could have if you could create it from nothing whenever you wanted
to do so.
Last but not least the federal reserve works in multiple ways and I will try to explain them to the best of
my ability. It tends to get a bit complicated. The most important thing here to remember is that the fed
is a private business which operates independently and is overseen (supposedly) by the government.
First of all the biggest and most obvious thing is that the fed prints money giving it value out of thin air
and then gives it away to big companies, other countries and foreign dictators. This is probably what
we're all familiar with when the fed will give out or loan money in large sums to large banks, car
companies, etc. The fed will also take part in other things such as quantitative easing programs where it
will buy up treasury bonds from the US and even debt from private companies with extremely low

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interest rates.
It will especially buy up debt or loan money to banks so they have excess cash on hand. The basic idea
is that the debt has very low interest with excess cash on hand people will buy government bonds,
banks will loan money and so will private companies. This in theory should keep interest rates low and
make life easier for everyone.
All of this is of course done by the Federal Reserve which creates money out of thin air to give out
either in the form of printing, generate via computer for loans or however they chose to do so. One can
see how this an odd system because fed will buy up US treasury notes. So in effect the fed creates
money, buys up debt from the treasury and then the U.S. government owes the fed money even though
they are supposed to be running the Federal Reserve. Strange, isn't it? So here is the basics for a recap.
The US was on a gold standard until 1913 when the country was taken off of it. Being on a gold
standard help make the US dollar the reserve currency. On a side note some people blame the gold
standard for the great depression although most experts agree that the federal reserve played a big role
in causing the depression in the first place.
Anyway, at 1971 the US stopped using the gold standard as a whole on a global scale which took the
entire world off of it. The federal reserve does not have our money backed by real world value but
instead by force of law. Whenever money is needed or they want to keep interest rates for borrowing
and lending low they print up money and buy up bad debt at low interest rates. Either way every time
they create money out of thin air they are creating money with no value to it and no limits. And the
larger the money supply is the lower the value of it is. Interest rates have been at record lows and the
federal reserve has been giving out giant amounts of cash but basically run away inflation and lack of
jobs in the US along with lack of business is driving our economy down no matter what they do. So in
the short, the more money you make from thin air with no limits, the less it is worth.
So you might ask why would they want to do this. Well, the idea is that by being able to create money
at will the federal reserve can increase our buying power much faster than if we had to back our money
with real world value and they also have exact control over our money supply. So naturally you can see
the problem in one group having the unlimited power to create money and control the money supply of
the USA and to a large extent, the world.
A brief note there is an excellent article here on the Roman Empire and Inflation:
http://mises.org/daily/3663
If you'll notice the Romans basically practiced an early version of what we do today. Which was they
had something of value gold and silver coins which everyone used. But when it became too much in
the way of costs to pay for their administration and the ongoing wars they got the idea to expand the
money supply by making it less and less silver and instead worthless metals which had no real value to
people. They practiced this for years making it more and less silver until even reaching a point where
soldiers and people working for the government or rich people used stuff such as gold for money
instead because their own usual currency had lost so much value. Sometimes being worth a thousand
times less than it originally was. This is basically just an early example of how inflation eventually
destroys the stability of a country.
Basically there is what I would call natural inflation due to natural changes in the market and an
increase in the money supply over time by people acquiring more things of value to back the money.
Then there is artificial inflation which we suffer from now where the supply of the money far outpaces

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the demand and makes the value of the money go down. Most people agree that a vast majority of the
increase of prices for things we have seen today including gold are more due the money itself losing
value than the items themselves becoming more scarce. In essence we're practicing a very similar
system to what the Romans did back in the day and also what help lead them to ruin.
A topic worth touching on is also the national debt which is funny because a friend and I had a
discussion about it in depth. If you're unsure of what the debt is there is a good piece here:
http://www.federalbudget.com/
But simply put the national debt is how much money the government owes. Now the two terms used as
debt and deficit. Simply put the government each year (I think) or however often the government
calculates how much money it will bring it through taxes and such versus how much it will spend.
If it is spending how then it is making it is called a deficit and the government must borrow the money
either from the federal reserve or another country to cover this shortfall. The money is borrowed at low
interest which will be paid back eventually. Now a debt is normal for any country to hold because a
country will be forced to borrow money and pay it back later on for any number of reasons. This here
helps show the basic idea of our debt over time:
http://en.wikipedia.org/wiki/History_of_the_U.S._public_debt
If you'll notice there is a basic connection here where we maintained a much smaller debt on average
until the federal reserve was created. This is when our debt mainly started to really jump up. It should
also be noted that not too long before we went off of the gold standard on a worldwide scale is when
we began to run a deficit every year. So that is basically what the debt is. The government cannot pay
its expenses so it borrows the money in the ways of treasury bonds and other such debts it owes with
the promise to pay it back in the future.
My friend was explaining to me how she feels the debt is used as a scare tactic which to be honest it is
used as a scare tactic a lot. But basically it is used to scare people and it is not as bad as we make it out
to be. In a way I do agree with her because the debt has been used as a scare tactic by people in politics
to gain points but the problem is a real one. Basically ever since the creation of the federal reserve and
going away from the gold standard we have become addicted to debt. Now our paying off debt to a
country is not like a regular Joe using a credit card and paying back with interest. The deal relates to
however the deal was set up and usual done in chunks.
You know so say we borrowed 1 million from China and then another 1 million later. The total debt we
owe is 2 million but generally I believe countries pay them off separately, not all together as one large
lump sum. While this is all fine though the real problem comes in the fact that we keep spending and
spending and spending and borrowing more than we are able to produce in terms of money. So we
borrow more and we also print more and you can see the insanity in this. Basically you're borrowing
with no real plan on how to pay it back and on top of that every time we print money the same money
we're going to pay people back with loses some of its value. The problem is and things like this relate
to out credit rating being downgraded for instance then eventually no one will want our money due to
inflation and no one will want to loan us or the government money because they do not feel it is a safe
investment in which they will get paid back. Our national debt has spiraled out of control once
averaging only in the millions to over 14 trillion now and climbing. The problems are a lot of problems
coming together but at the heart of all of this is our printing of money.
The federal reserve has been cited for doing multiple things wrong including losing 9 trillion in dollars

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http://www.dailymarkets.com/economy/2009/05/14/federal-reserve-cannot-account-for-9-trillion/ and
loaning out 16 trillion without Congress having known about it, http://www.unelected.org/audit-of-the-
federal-reserve-reveals-16-trillion-in-secret-bailouts
A final thought some people might think I am wrong here and say that Bill Clinton balanced the budget
and paid off the national debt. This however is not true. There is a good article here:
http://www.craigsteiner.us/articles/16
The long and short of it is basically that Clinton paid down the public debt while increasing
government debt. So overall debt increased during his time in office. Just something to keep in mind.
So all of this together shows us the problems we face with our run away inflation and that going on a
stable currency which cannot be manipulated is our best way to get back to financial freedom.

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