Raising Prices and Debasing Currency


What is price level? In a general view it is a static price of goods and services. However, there is no real price level. This is because prices change often. In an economy it is a hard job to keep the prices the same, but if inflation was eliminated then it would be easier. Nevertheless, if there is no price level, how can you prove that monetary inflation raises prices?

It seems like a hard question, but the answer is simple. Notwithstanding, it is hard for many to understand this when their mind has been set or configured in a certain way. What is inflation? According to the dictionary, it is a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency. In other words, it is creating or printing money out of nowhere, causing prices to be raised, and the value of money to be lowered. Let me paint a picture for you. Imagine a baker that sells bread. He has set his prices at two dollars a bread wrap. All of a sudden, the government decides to inflate. The money is then passed down from hand to hand, until it reaches the baker. After it has reached the baker, it is too late to make a profit out of it. However, the baker has now realized that all this time there was more money in the economy, and since he doesn´t want to make losses, but wants to be a part of it, he raises his bread wrap prices to two dollars and fifty cents. This menas that the people that received the newly printed money first were the winners, for they were able to buy things at yesterday´s prices. However, the people that received the money later, and the baker were the losers, for they get to buy the things at a risen price.

When an economy has 1oo dollars, but because of inflation it extends to 150 dollars, then prices are raised. It costed me to two dollars for a bread wrap, but now it costs me 25% more. This means that not only did prices rise, but now the value of money has shrinked. I used to value the bread wrap for two dollars, but now I value it for $2.50. The baker used to think that his money was worth something, but now he has realized that the more money there is the poorer he is. This is because of the debasing currency. However, this is only half of the explanation for inflation or counterfeiting is really based on debt. (I explain this in the following essays):

Categories: Economics | Tags: , , , | Leave a comment

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