Ask Lemmy

There are two types of inflation. Global that comes from increases in the money supply by countries that used to be by printing money but in modern times is done through lending. When a bank loans money it only needs to have a fraction of the loan amount as a hedge but otherwise the money is essentially created and there is now more money to go around. There is also a more local inflation effect that happens individually on items due to supply and demand. The thing about that effect is barring money supply increase its relative. People have to choose to put their money toward the particular thing even as the price increases for some reason. Like paper towels and toilet paper during a pandemic. So it is usually temporary but not always as sometimes things become more expensive to make. For example if soil degradation happens then food cannot be grown in as much abundance than before and prices go up. Since people have to eat they will forgo lesser necesities if necessary. Also for example in the past when we used to drill for oil it was near the surface and easily accessible. Using the energy of one barrel of oil would net you over 100 barrels of oil. Today the return is based on source but we have sources that return only single digit barrels per barrel. One reason saudi does so well is they have consistently had the higher returns on a per oil basis. Theirs have still gone down but comparatively maintained a good rate of return. This is also how come hardwood used to be relatively cheap but since it takes a long time to grow (approx a century) it is now very expensive and most people will use softwoods or some sort of alternative. So shrinking resources or more effort to get resources along with more people means higher relative value for things people need. Earth overshoot day is now in july and it was the early 1970's when we last used only the amount of renewable resources that the earth renewed in a year so we were break even back then and have to gut things more and more as times goes by https://overshoot.footprintnetwork.org/. Now technology can find us new options but if that was happening well enough we would still be using no more than what the earth can recover from each year. Its not completely technologies fault as we have seen an effect that when we get more we use more. So like you get led lights but then people have more lights which are on more often or we get some other technology that uses more power or such.

The way I understood it, it's a passive tax done by central bank. They take the value of money you hold and depreciate it without touching it. They do it year by year or depending on what government your in. It's a cruel system that encourages people to spend now. Else your 1$ will be less than 1$ in the next year it's cruel to those people living paycheck to paycheck wanting to save money for big purchases are forced to take loans with interest else you will always be playing catchup making you pay more in the long run. Honestly why would be so worried about people not spending we have survive long before capitalism even exist this system also encourage the destruction of our environment.

There are a lot of explanations about how it happens.

But the word, inflation, only means that the same amount of money "tokens" can buy less amount of "good and services" in relation of two different moments in time.

How that can be caused is where complication and expectations (and a LOT of political propaganda) begins.

Ok, let's start simple and work our way to inflation. Let's imagine a world where the government prints a certain amount of money, to make things easier let's say 1 trillion dollars, and no more will ever be printed, this makes it so that in absolute terms you can think as 1$ as a 1/1 trillion so you can buy stuff relatively to how common they are, if we produced 1 trillion kg of rice, then 1kg of rice should cost 1$, but if we produced 2 trillions then the price drops to 50 cents.

Cool, things make sense, however there are some problems with this approach, money gets destroyed, or otherwise lost forever, so in the long run $1 becomes rarer than 1/1 trillion, let's exaggerate that and imagine there are now only $1000, it doesn't make sense that a 1$ buys only 1kg of rice anymore. This is called a deflationary currency, and this is bad, because if you know this is the way money works you wouldn't spend your money because it will be more in the future.

Ok, let's try to combat that, let's then say that the government prints a certain fixed amount of money every year. Some years less money would be lost, those years the value of money would decrease, other years more money would be destroyed, and those years the money would be worth more.

What happens now? Well, people would speculate, and not spend in some years, overspend in others, and the economy would be a wild mess because some years people would hoard money because it would be worth more next year.

Ok, what if the government tried to estimate exactly how much money got lost and printed the same amount, so you (in theory) always have the same amount of money going around.

Turns out this also is a bad idea in the long run. Because while money won't increase in value because there's a limited amount it becomes a 0-sum game. Why is that a bad thing? Well, if there are only 1 trillion dollars in circulation, each dollar I hold and refuse to use increases the value of every other dollar I have, so people with lots of money would hoard their money as much as possible to make the rest worth more, allowing him to earn more and store more and turn the currency into a deflationary currency again.

This leaves us with only one option, the government has to print more money than what's lost, this makes money be worth less with time, but also forces people to invest their money instead of hoarding it, because otherwise it's worth less, and if they invest it it's circulating in the economy so in theory everyone wins.

When Capitalism was being theorized, a guy name Sonic Smith had discovered that over time as more money is minted, it loses value, and thus inflation. Thus, when it came time to implement capitalism, it became the 34th rule of capital that was defined.

To learn more, google "rule 34 sonic inflation"

Thanks everyone for the replies. I understand more about the mechanics now. Made me hate capitalism a bit more than I already do, but I guess someone was right when they said a little knowledge is a dangerous thing.

I considered answering this one, but while mapping out what I knew about inflation, I realized, I don't really know either. I know what it means, but not the how's and the why. Although, I'm betting corporate greed is behind it.

It's easy to get the "what", while the "why" is a bit more complex. But I'll try to provide a simplified explanation through 3xWhy:

In short, more money is available for bargaining over the same resources.

Why?

When economic growth outpaces production, you pretty much create money that isn't backed by anything.

Why?

You put money in the bank, you earn some interest. The bank loans this money to someone else, they also earn interest. And the thing is, banks don't need to actually have the money they loan out. They only need to cover a percentage of it. In effect, money is created from nothing.

Why?

It's called fractional reserve banking. IIRC, the Dutch started it, but don't quote me on that. It was done in an effort to make it easier to keep me ney in circulation and foster economic growth. In short, the bank doesn't have to wait for person A to repay the loan before providing a loan to person B.

Isn't this a horrible idea?

Not necessarily. If handled poorly, it truly can be horrible. See 2008 for more details. But when done right it allows more people to do more with less. So inflation isn't inherently a bad thing, provided that wage growth keeps up. If I'm not mistaken, 2% is a pretty common inflation target in developed economies during stable periods.

Imagine money was made of ice cubes. The longer you have them, the more they melt, the less value they have. When you want to buy a hamburger it takes so much ice, but the ice cubes you have keep getting smaller, so the longer you wait the more ice cubes that hamburger will cost.

That's basically inflation, and the reason this is better than deflation, is you don't want people hoarding transactional currencies. So governments want their currency to be ever so slightly inflationary, they want the ice melting just a little bit, so it's better that people use it than hold on to it.

I find this easier to understand with comic books, since I'm a bit of a collector:

Action Comics #1, the first issue to feature Superman, originally printed 200,000 issues in 1938 and sold for 10¢ each.

But because it's a highly desirable issue and there are currently less than 100 copies left in existence (that we know of), their value has skyrocketed. One copy sold for $6 million last year! It's worth a lot because it's so rare and so many people want a copy for their collection. Scarcity makes the price go up, because it's valuable and desirable to so many collectors.

Money works the same way, but in reverse. Back in 1938, when that Action Comics #1 released, it was only worth 10¢. Back then, there wasn't as much money in circulation in the US, so 10¢ could buy you a lot of things. Comics, groceries, gas, etc. all were less than a dollar.

But every single year, the Federal Reserve orders more money to be printed for circulation. More money in circulation means that it's all worth less.

Remember that Action Comics #1? When there were 200,000 copies available, they were worth only 10¢. But now that there are less than 100 left, they're worth millions. Money is the same way, but it's moving in reverse. As more is printed, it's all worth less.

Back in 1938, a comic cost 10¢. But today, there is so much money printed and in circulation, that a modern comic costs about $5. That's 50x more expensive! The overall value of comics hasn't changed; they're just paper with printings on it. Heck, you could argue that it should be worth less today because they're so much easier to print with modern technology. But because there's so much money in circulation, its value has tanked and you need lots more money to buy the same product.

Granted, money doesn't stay in circulation forever. Bills get old and tattered and eventually become destroyed and unusable. Coins disappear or get melted down. Both types of currency get returned to the Federal Reserve to be removed from circulation and destroyed. But we still print much more money than what falls out of circulation each year. And they estimate how much money is in circulation annually to better approximate inflation each year.

So why do we keep printing money? Because more and more people are born, more products and services are being made and sold, and our economy keeps growing. We can't just circulate the same amount of currency forever; our economy would stagnate and certain groups of people would just never earn money. And in our capitalist society, if you don't have money, you can't survive.

So... We keep printing money to keep up with the demands of capitalism, and the growth in circulating currency means it's all worth less. Therefore, it costs much more to buy the same item as time goes on. A comic in 1938 costs 10¢. Today, it costs $5. Because there's so much more money in the world, the value of money is less and you need more money to buy the same things.

Money isn't real. Currency is real, but currency only represents money. Inflation is when a unit of currency lowers in value, or to put it another way, when it takes a greater amount of currency to obtain the same value. Prices go up, a loaf of bread goes from $2 to $4 over a decade. The bread is still worth the same, more-or-less. It's the currency used to buy it that changed in value.

Why have inflation? A small, and more importantly steady, amount is good (under capitalism), as it discourages hoarding wealth and incentivizes investing it. Hoard enough money to buy 100 loaves of bread and in ten years you'll only be able to buy 50, after all. So entities with excess wealth invest it, hopefully in ways that have a return better than inflation. A bank lends Jill McLastname $100K to buy a house. Inflation is 2%, Jill has good credit and is likely to pay it back, so they charge her 3% interest. Now instead of losing 2% every year, the bank gains 1%. And Jill gets to buy a house a decade sooner than if she was saving up. That's the idea, anyway?

When is inflation bad? When it's too high or too volatile. If your currency halves in value every year, there's all sorts of problems:

• you have to keep issuing larger banknotes, the design, security, and printing of which all have overhead costs

• saving is functionally impossible, causing people to live without a financial safety net

• people start using other currencies or even bartering, removing monetary policy from your control

And similarly, inflation that's too volatile also has problems:

• Lending becomes risky as a loan at a fixed percentage might lose you money instead of make you money

• Those selling goods or labour can't accurately estimate how much they should be selling them for, as the value of the currency doesn't change in a predictable way

How does inflation happen? There's at least two parts of this that I know of:

Part one is that healthy economies grow over time. A greater value of goods and services will be produced in year N+1 than in year N. Greater total value represented by the same amount of currency would be deflation, which encourages hoarding and stifles the growing economy, so it's important to add at least that much currency and better a little too much than not enough. That "little too much" is inflation.

Part two us that the institution issuing the currency is often a government, and governments sometimes need money in a hurry. Sure, they could try to borrow it, but they can also just... print more and spend it. Sure, it makes all the other currency worth less, but it's better than not being able to raise funds in an emergency.

Change in purchasing power of money over time. Practically imperceptible in real time to the naked eye. The higher the rate, the sooner you'll notice the change.

https://youtu.be/MAvHgmewRDM

Aside from the useful answers you’ve gotten here, this should help as well.

Greedy people being greedy is what inflation is.

They will say this and that economic factor.. blah blah blah...it's all bullshit. Greed is the reason for inflation.

There's a lot of complicated forces at play, and this isn't in my particular field of expertise, but inflation is basically when the supply of money increases, but the actual supply of things money can buy doesnt keep up.

Think of an (extremely oversimplified) economy: one person farms, and another person raises cattle. They've agreed to use red rocks to symbolize trades, due to the fact that the rancher can work all year, but the farmer only provides produce with the harvest seasons.

One year, each person finds an extra cache of red rocks, but the extra currency doesn't actually allow either individual to farm or ranch any more. Each one knows that the rocks are more plentiful, and so less valuable. The rancher expects more rocks for his meat, because he knows he'll need more rocks to buy produce.

The two main ways that currency is created (again, within my limited knowledge) is through minting and fractional reserve banking. There's plenty of explanations for either, so I'll gloss over. On the other hand, inflation can occur if production decreases, or even fails to increase as fast as expected.

Let’s say you’re a producer of goods. Now let’s say the production costs of goods go up, because of something like increased Fed interest rates or, say, reckless tariffs. The cost you charge for your goods goes up because Profit is God. But now all your employees have to pay more for their food and other goods, so they aren’t as happy with their wages. The buying power of their dollar has gone down. So now in order to retain employees, your labor costs go up. So the cost of goods goes up. Lather, rinse, repeat.

Amount of stuff to buy = Doesn't change

Amount of [currency] = Increase

Voila, inflation

Why does amount of [currency] increase? Loans, government decide to print them, and... if you ask me why does government print more money? Honestly I don't know why governments print more money, like... I'm still confused on why we can't just have the same amount of money forever (I mean: other than re-printing bills to replace damaged ones)

“Everything is made up and the points don’t matter!”

I am of no help on this topic other than, the value of money is literally made up. We just sort of agree how much it’s worth at this point. Which doesn’t seem to be decided by you or me.

Also, “it’s complicated” is usually code for: this is really straight forward but bad so let’s make it hard to understand to hide the bad part.

But, as I understand it, we all collectively hallucinate value and when we start to sober up they have to rush and hit us with another dose. We’re just perpetually rebalancing our illusion.

Everyone wants more than they have. Labor wants to be paid more this year than last, producers want to get paid more this year than last. In the money treadmill of the economy, that means everyone raises prices to pay for the rising prices.

It comes from excess production or profits. Labor creates more value than it gets paid; businesses charge more than their products cost; banks loan more money than they hold. There's just extra money floating around competing to buy finite resources. The extra money accumulates over time, which makes money itself less valuable.

There are a lot of parts to inflation, but I'll do my best.

Money is used as a medium of exchange. It's convenient, easily countable, and an agreed upon unit of value. A dollar is a very, very small slice of the entire worth of the economy. As processes improve and production increases, the economy gets bigger. Because of this, we need more dollars to divide it into smaller pieces. The Federal Bank "prints" money to give us smaller pieces of the economy we can use. That's why we have "more" money. Your wealth is the same; it's just represented using more dollars. This is the Money Supply.

When you say inflation, and you're referring to the pinch you feel in your wallet, generally that's when the money supply grows faster than the economy is growing. For example, after WW1 Germany began increasing the money supply to repay loans for postwar reparations. But without the economy floundering and the money supply rapidly growing, they experienced intense inflation. The money people had was becoming a smaller slice of the same economy. It was becoming worth less.

Inflation is rather complicated. I had a whole semester about it in college, but generally, this is what it is.

A combo meal at in n out used to be $5. Now it’s $12.

Farmer monkey grow 1000 bananas each year. For monkeys to get bananas, the monkey government make leaves. First year, they make 1000 leaves, so a monkey can exchange one banana with one leaf. People consume the bananas, but leaves do not perish.

Next year, farmer monkey grow 1200 bananas. If monkey government makes 1000 leaves that year, total leaves in the monkey country becomes 2000. Farmer monkey cannot keep the previous year's exchange rate as they would run out of bananas, so it starts to charge more to break even.

In the 1960s, you could buy a candy bar for 25c. Today, the same candy bar is like $5.

That $5 has the same buying power as 25c in the 60s. It means the money is worth less over time.