Inflation!!

I have to diverge a bit from what I promised you in the previous post. I think I need to address the issue of inflation first.

I once asked a friend, "Why are prices of goods around us increasing?"
He replied, "Inflation."
I stared at him, expecting him to say more, but his eyes were quizzical. "Not Happy!?! What do you want, huh!"

If you ask anyone on the streets this question, most likely they'll say what my friend said to me. But it is doubtful that they know exactly the process of inflation, nor will they really realize the impact of inflation.

To give you an example using the US dollar here: Had there been not such rampant inflation of the USD in the past 100 years, a barrel of crude oil would have cost only $3.50 instead of $70 right now. A $55,000 car now would have cost only $1,500.

That is the disastrous effect of inflation. It basically means that your purchasing power with your money drops. USD has dropped in value (and purchasing power) by more than 96% in the past 100 years. In the more serious case of hyperinflation, you will see your ENTIRE life savings wiped out overnight.

How is this possible? The reason is because of rampant central banks' creation of currencies. Creation of currencies out of thin air. If you remember the goldsmith story (real story) in the previous post, you can probably figure out why. The goldsmith printed 3 receipts, which should be exchangeable for 3000 oz of gold. However, those receipts are only worth 2000 oz gold. The paper receipt in your hand loses purchasing power.

Recently, a Canadian minister did a survey on the people on the streets. High-flying professionals, graduates with great degrees, poor people, rich people, he interviewed them all. What he found out was that not a single one of them knows accurately how money is created. I have mentioned central banks' ability to create currencies out of thin air, but there is more to this (I'll explain next time).

When central banks print currencies, these excess currencies have to go somewhere. These currencies have to chase after the same amount of real goods in the economy. Thus the effect is a general rise in prices, what we perceive as inflation.

The original definition of inflation was: An increase in supply of currencies (more than an increase in supply of real goods)
Now, its definition has been tweaked to: A general rise in prices.

If the word has kept its original definition, maybe more of the population can see the truth. That reckless printing of currencies will lead to inflation down the road. No doubt, printing of currencies spur economic growth, but that is only in the short term, and this economic growth creates an illusion of prosperity. In the long term, there will be economic crashes. This is short term gain, long term pain. I do not know how the current popular definition of inflation got a foothold in our dictionary.

I hope by now that you see the real story behind inflation. The central banks have the power to create excess currencies. Specifically, I want to talk about the US Federal Reserves, and how its actions are going to contribute to a great economic collapse in the near future, an economic depression potentially more disastrous than the Great Depression in 1930s when international trade plunged by more than 1/2 to 2/3. In fact, our recent financial crisis could have been this disastrous, had it not been for government intervention in pumping huge bucket loads of credit into the economy, with plans for more stimulus if they deem it necessary. This seems like the right thing to do, because we are hearing reports that the economy is improving, that the worse is behind us................or is it?

I'll end the post here. Time for some Japanese drama :D


Jin