Tony Lepage

Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.

There exists a simple definition for one of the most used and abused terms in the economic world. And while you might think there isn’t anything wrong with the current usage of the term, I assure you, after a quick summary, you’ll be picking out inaccurate financial articles weekly.

There should be no mystery surrounding the term inflation. Inflation, plain and simple, is the expansion of the money supply. The more money in an economy, the higher prices will tend to be and the less your money is worth.

Take a look at this inaccurate article. To sum it up, the article claims that a rise in housing, food and, energy prices is causing inflation. This is completely inaccurate. If rising prices cause inflation, falling prices should cause deflation. Rising prices are meerly a symptom of an economy with an expanding money supply.

The Bank of Canada, the Federal Reserve and other Central Banks of the world would have you believe they are fighting inflation. This is what everyone has been tricked into believing (Yes, tricked, but just be happy you didn’t invest time and money into an economics degree).

Let’s imagine a scenario where you are able to counterfeight one billion dollars. For the sake of argument, no one will ever find out. It wouldn’t be a stretch to say you’re rich. You’d be so rich that you would have a lot of trouble spending the money. You’ll get to enjoy buying all sorts of things. The furniture dealer you shop at will also feel some of that wealth and he’ll go on to buy some fancy cars. In turn this would make the car dealers feel pretty wealthy. This will continue across the entire economy.

As the money spreads across the economy into more and more hands, this will cause prices to go up. Prices will rise because you’ve expanded the money supply. You’ve traded nothing for something of value and because you spent the money first you’ve seen the most benefits. The larger the economy, the slower this process.

Just think of the game monopoly, 500 dollars is a heck of a lot in that game because there isn’t a lot of monopoly money in the bank to start with. Now think about what would happen if you doubled the money in the bank. When you look at a country like USA and see their massive deficits growing and growing, be sure that you understand what’s happening. They lower taxes and just print a ton to make up for the taxes they aren’t collecting.

Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.[1]

And who runs the printing machines? Well in the USA the counterfeiter is the Federal Reserve and in Canada it’s the Bank of Canada. Wait a second, if they’re printing the money, then they are expanding the money supply. If an expansion of the money supply is the real definition of inflation, how can we believe that they’re implementing inflation fighting policies?

They’re not.

Next time you see news media claiming high oil prices are causing inflation, you’d do best to fear anything they have to say. Inflation is the root, rising prices are a side effect.

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[1] Jens O. Parsson Dying of Money: Lessons of the Great German & American Inflations.