The curse of inflation - on the causes of inflation, and the best way to deal with it.
Inflation is not a complex phenomenon. The principle behind it is very simple. If the supply of goods increases while the money supply remains the same, prices are expected to fall. This is what we call deflation. If the supply of goods and the supply of money increase at the same rate, then prices will remain the same. This is what we call price stability. But if the money supply grows faster than the supply of goods, then prices will rise, and we will experience inflation. Contrary to what we’ve been told to believe, inflation is not an accident. It is mainly the fault of our governments, who abuse the right to create new money.
Most economists nowadays deny this fact. They claim that under the current monetary system the government doesn’t have the authority to print money at all, and that this power has been given to the central bank. Moreover, they say, most of the money in the economy is not created by the central bank, but by the commercial banks, as they issue new loans. There is truth to these claims. During the twentieth century, the authority to create new money was indeed taken away from the governments and transferred to the banking system, in order to deal with the government’s tendency to print too much money and generate inflation. But in the past decade, central banks have betrayed their traditional role as gatekeepers, and began to finance the government's deficits, by printing money out of thin air, in a process known as quantitative easing. In effect, this is equivalent to the printing of money by the government.
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