Inflating my Return

Yes I have been gone for a long while. A really long while. The simple fact is that I was in the middle of conducting a research project and getting good grades in college. I have now graduated Summa Cum Laude with a Degree in Psychology, minor in Philosophy, and an award for my research. That was a crap load of work, but it is over. I am back and have enough free time to write something here for my non-existent readers. It has always seemed like a stupid idea to keep a running record of stupidity for posterity to look at, but I believe in unwavering honesty about my ignorance and (hopefully) evolving intelligence. I think it keeps me in check should I ever become so full of myself that I think I am infallible.

Of course who cares about this crap, let's talk about inflation. First of all, what is inflation? Inflation is the relative change in price of one commodity in relation to another. I must make sure this is understood. There is no one inflation, there are hundreds of inflations, and a few averages we use. For the purposes of this discussion, we will only be talking about inflation of commodities relative to money.

The best way to explain why inflation occurs is to imagine that you wanted to buy apples. You certainly would not buy just one apple every time you went to a supermarket, the gas would quickly add up. Instead you would probably buy say, two dozen apples so that you could make some apple pies or apple butter. Suppose for a moment that the man from the farmers market had exactly 24 apples, and that he could sell them to you for $15 (organic is expensive). Well, assuming you thought this was a fair price, you would buy those apples.

Now suppose the next year he had a bumper crop of 40 apples. Well he could sell them for the same price of 8 apples for $5, but past experience tells him that you would only buy 24 apples. Indeed, you probably don't want much more than that because while you may like apples, more apples can be boring. Indeed, each additional apple would be worth less to you than the previous apple. The farmer though has more apples, and it would be crazy to sell you 24 apples for $15 and then get stuck with 16 apples that he cannot sell. After all, his apples are worth something. The solution is that you lower the price of the apples with regard to how many he wishes to sell (all of them). You may not be willing to buy more apples at the current price, but a slightly lower price would eventually be found so that the farmer could make his extra sum of money and yet you would still be willing to buy.

Now the Farmer has a bad crop and only has 16 apples to sell. He still wants to make the most he can make of his crop, but he does not have the supply. The farmer could try to sell the apples at the usual price of a normal crop, but if he did, he would make only $10. The simple fact is that the farmer would want to raise the prices so he could make more per apple. Sure, you would not want to buy as many apples if they cost more, but he does not care if you are unwilling to buy 24 apples if he only has 16!

How does this apply to inflation? Remember that all other commodities are supposed to be fixed (to a certain extent) while the monetary supply is increasing. If we were bartering corn for apples, a certain amount of corn would be worth a certain amount of apples depending on their demand and supply. Also a certain amount of money would be equal to those two quantities of commodities. However if the amount of money in the system increases, the amount of apples used to buy corn is still the same, yet there is more money. So either the money is not circulated, or the money loses value in comparison to the apples and corn. Adding money does not add wealth like so many Keynesian scholars may have you believe (even Keynes would disagree with this idea so I am not really sure where this idea comes from). Wealth is the usable resources that are in existence. Money is merely a commodity used to standardize bartering practices. Printing money does not create more food, build more houses, make new games, design new phones. The only thing money does is create a standard that all people can use to trade value for value. Indeed, as long as the purpose of the commodity is clear, it does not matter what is used. If everyone began to use paperclips as a standard of value, that would work just as well. This is not that far fetched. After all, most money is now electronic bits.

I think I am done for the day. I will be back later next week to talk more about inflation.

Nowhereman