The nature of inflation and the problems with the paper standard

Generating paper currency is remarkably straightforward. When a government determines the need for more money, it simply activates its printing operations, producing additional currency as long as there is a supply of paper and ink. This process, which might be viewed as sanctioned counterfeiting, is officially termed as expanding the money supply, a euphemism preferred for its positive public relations connotation. Typically, governments are reluctant to justify these actions in terms that the general populace can easily grasp.

When pushed for a straightforward explanation, authorities often argue that without a regular increase in the money supply, most people's earnings would rarely see growth. This argument holds merit. In an economy strictly adhering to the gold standard, individuals are compensated fairly for the services they provide and the goods they produce. Thus, despite Joe Lacklustre's demands for automatic yearly wage hikes, unless there's a significant rise in the gold reserve, the financial resources for such increases are nonexistent. Instead, pay raises are allocated to employees who have demonstrated notable improvements in their value to the company, be it through further education, experience, or innate talent. The principle is clear: the more one contributes, the more they are rewarded. It's an intriguing concept, isn't it?

Under the guise of the paper standard, with an ever-growing money supply, individuals like Joe Lackluster often secure a minor share of this increase, fostering the mistaken belief that they are advancing financially. This perceived growth in personal wealth keeps the populace content, reducing scrutiny towards the economy and the political figures responsible for its oversight. Essentially, this strategy soothes the masses, boosting the reelection prospects for those in power. Such is the reluctant confession of governments. Yet, what they are even more hesitant to acknowledge is the expectation this creates among workers for automatic wage increases, irrespective of their actual contribution or value to their employers.

The practice of distributing portions of the increased money supply to workers has led to a diminished incentive for employers to reward productivity accurately. Since many employees receive automatic annual raises, the need to reward exemplary performance is lessened, often resulting in the most significant rewards going to those favored, rather than those who are most productive. This approach can lead to inefficiencies where production is not adequately incentivized, and non-productive activities are sometimes rewarded, leading to a decrease in overall output and quality.

The common misconception that demanding higher wages directly leads to price increases is a diversion from the real issue. The primary reason prices escalate is due to the expansion of the money supply, which introduces more currency into circulation. This excess cash is quickly absorbed by rising costs, creating a cycle where the availability of more money necessitates higher prices. In essence, without an increase in prices, there would be no mechanism for distributing the newly created money throughout the economy. Businesses and service providers raise their prices not out of greed, but as a response to the increased money supply, ensuring they claim a portion of the financial influx.

Contrary to popular belief, a society where neither salaries nor prices automatically escalate is not inherently dissatisfactory. The assumption that perpetual increases in wages and costs are necessary for economic contentment is flawed. Stability in prices and incomes does not equate to unhappiness; rather, it suggests a balanced economy where the value of money remains constant, preventing the erosion of purchasing power that accompanies inflation.

In a stable economic environment where the money supply is not artificially inflated, individuals understand that enhancing their living standards requires increased productivity and that their efforts will be duly rewarded. This understanding fosters a predictable standard of living, contributing to overall happiness. Price stability, exemplified by the cost of goods like widgets remaining consistent over time, adds to this predictability, enhancing people's sense of security and confidence in the future. Such transparency makes economics an accessible topic for the general populace, provided the government is transparent about its actions.

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At the heart of our discussion is the concept of inflation, which is characterized by an increase in the money supply leading to a general and continuous rise in prices. An Oversimplification, inflation results from the government printing more money, causing prices to escalate. This cycle disrupts the predictability and stability that contribute to economic contentment and understanding.

The paradox of inflation reveals a government's nuanced strategy to finance expenditure beyond its means without the political fallout of raising taxes directly. Historically, prior to the implementation of federal income tax in 1913, the U.S. managed its finances without such measures for over a century, with even the notion of a 10% tax ceiling being dismissed to avoid public backlash against potential fiscal exorbitance. This fiscal maneuvering, ostensibly a less visible alternative to tax hikes, erodes currency value, seeding economic instability and diminishing purchasing power, as the once rarefied currency becomes devalued through ubiquity. This historical context underscores the intrinsic conflict between governmental fiscal desires and the economic well-being of its citizenry, manifesting in the contemporary ubiquity of federal income taxation and the pervasive impact of inflation on everyday financial security.

The immediate effect is akin to the government reaching into the pockets of each citizen, covertly extracting hard-earned dollars. This act, which the government might euphemistically term "revenue enhancement," effectively boosts its revenue but is essentially a form of surreptitious taxation imposed on its citizens without their consent. Inflating the money supply, in this context, is compared to the illicit act of repeatedly stealing from a cookie jar, a deed that becomes progressively easier with each transgression. Eventually, this leads to a precarious situation where control is nearly lost, as the inflation rate escalates uncontrollably. The government then discovers that its printing presses have spiraled out of control, analogous to a speeding car that, when the brakes are applied imprecisely, might dangerously fishtail, illustrating the perilous nature of indiscriminate monetary expansion.

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The analogy extends to monetary policy, where excessive tightening could precipitate significant economic distress, akin to injuries sustained from a car skidding or rolling into a ditch. On the other hand, escalating the pace merely postpones an unavoidable disaster, heightening the risk of a catastrophic outcome.

During hyperinflation, prices increase dramatically, often overnight, and efforts to reduce money printing can lead to a severe depression. This situation can force people to use vast amounts of now worthless currency for basic needs, causing societal unrest, riots, and looting as the value of currency diminishes to the point of being used for trivial purposes in several countries.

When economists start discussing inflationary spirals, recessions, and the need for new economic rules, expressing a desire for straightforward solutions and inventing terms like stagflation to address severe economic issues without alarming the populace who rely on their government's judgment. This concern typically arises when a government accumulates a significant national debt, when prices have risen markedly over a few years, and when the question arises whether higher earnings justify the increased tax burden. These signs often precede a challenging period initiated by the government's decision to replace citizens' tangible gold coins with a theoretically adequate but ultimately valueless alternative, and then to produce this substitute excessively as if there were no consequences.

In summary, a government lacking sufficient funds to support its desired lavish lifestyle and unable to budget effectively, opts to confiscate real wealth from its citizens, offering in return a temporary but fundamentally flawed currency, subsequently leading to rampant production of this currency without foresight. As a result, the government expands and becomes excessively large. When the inevitable consequences arrive, the government, overwhelmed by its own excess, casts blame on its citizens for demanding higher wages among other unfounded reasons, implores its economists for miraculous solutions, and hopes desperately that the deteriorating economy does not collapse disastrously. The recurrent lesson ignored by politicians is the inexorable truth that there are no free benefits.

Just as a skilled driver can regain control of a vehicle spinning out of control, a capable leader can stabilize an economy plagued by inflation before it's too late. However, this task is far from easy, and one should not be misled into expecting long-term prosperity as long as the country operates on a paper currency system, despite what some government economists might claim. I often face criticism from some economists for my views, which they deem simplistic. Yet, I argue that many of these economists have lost sight of the fundamental principle of economy: the necessity for frugality, efficiency, and thriftiness in managing expenditures. Sadly, many government economists fall short of embodying these principles, leading to the misguided solution of inflating the money supply as a deceitful attempt to address economic issues.