Opinion: Inflation

POSTED: 10/8/12 3:58 PM

In the free Intro to Budgeting public workshops I gave in the districts of Dutch Quarter, Hope Estate, Cole Bay, and St Peters in collaboration with S.I.F.M.A and the “Department of Community Development, Family & Humanitarian Affairs” from August 28th to September 24th, one of the questions I asked the attendees was what is inflation. Practically all of the persons answered that it is the rise in prices or the rise in the cost of living. Another question I asked the attendees to write down an answer to is what in their minds they believe money to be. Many of the answers made me smile and giggle. Despite the smiling and giggling however many of the answers would indicate that we have a lot of work to do. It is my belief that just as you need a license to be able to drive a vehicle one should have some sort of license to be able to use money. I don’t need to convince you of this because if you look at what is happening globally, enough evidence surrounds us.
First of all, inflation is not rising prices. Rising prices is a symptom of inflation. Let me explain by way of a simple example from Chris Martison. “Suppose you are on a life raft (with a number of other persons) and somebody on board has an orange that he is willing to sell for money. Only one person in the raft has any money, and that’s a single dollar. So the orange sells for a dollar. But wait! Just before it sells you find a ten dollar bill in your pocket. Now how much do you suppose the orange sells for? That’s right, ten bucks. It’s still the same orange right? Nothing about the utility or desirability of the orange has changed from one minute to the next, only the amount of money kicking around in the boat.
But what would happen to the price if suddenly ten persons suddenly realized that they also have an orange and they are also willing to sell it? It would mean now that the total supply of oranges will be eleven (11) and the total amount of money within the raft will be eleven dollars ($11) which will bring the price right back to $1 per orange. And what’s true within a tiny life raft is equally true across an entire nation. So we can make this claim: inflation is, everywhere and always, a monetary phenomenon.
Chris goes on to say: inflation is caused by the presence of too much money in relation to goods and services. What we experience are things going up in price, but in fact, inflation is really the value of your money going down simply because there’s too much of it around.” Chris is on the right path to explaining inflation but he left out a critical component which will be addressed in the following paragraph.
How does this too much money come about? This is why reading various literatures for different points of thoughts are so critical because each part solves a piece of the puzzle. Thomas Greco explains how this “too” much money comes about. Greco goes on to explain that too much money comes about from improper issuance of it in the economy. But how is that accomplished and who might be responsible?
“These are the possible inflators of money: private counterfeiters, central banks, commercial banks, and central governments. The vast majority of money however is created by commercial banks by the process of lending it into circulation. They have the power to make loans (issue money) on either a proper basis or an improper basis. It is not the amount of money per se that causes inflation, but the basis upon which it is created. Loans made on an improper basis have the effect of inflating the money supply.
What would be an improper basis? An improper basis is any loan that does not put goods or services into the market either immediately or in the very near term. Commercial banks play a dual role. They act both as “depositories” and as “banks of issue.” In their role of depository, banks lend out depositors’ funds (your savings and mine) to those who have need of them. That may be for either consumption or the creation of new productive capacity (capital formation). When they do this, these deposits are temporarily no longer available for the depositor to access it. As banks for issue, they (should) create new deposits (money) on the basis of short-term commercial bills that accompany the delivery of goods to market.
That’s the way it is supposed to work. In practice, however, banks these days make little distinction between these two roles and commonly create deposits (money) by making loans to finance both the flow of goods and services into the market as well as making loans that take them out of the market. When a bank makes a loan for the purpose of financing consumer purchases or for investment in long-term productive assets, those newly created deposits, as opposed to using (existing) depository deposits (existing money), are inflationary because 1) consumer purchases do not accompany the delivery of goods and services to the market place and 2) long-term productive assets usually deliver goods and services to the marketplace only in the distant future, or not at all.” –Adapted from: The End of Money and The future of Civilisation, Thomas H. Greco, pages 62-64 –
The bottom line is that only the monetary authority can cause inflation and only the monetary authority can stop it. The piper must be paid; the only question is: who will be made to foot the bill?
Emilio Kalmera

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