Why Do Prices Seem to Increase Every Year?
Unraveling the Cause of Inflation
“We cannot solve our problems with the same thinking we used when we created them.”
— Albert Einstein
Economy of Scale
According to modern economic theory and common sense, items should become cheaper as we continually improve our methods of production.
Food should be cheaper as we perfect our farming techniques. Clothing should be cheaper as we develop new production facilities. Houses should be cheaper as we improve our construction methods and abilities.
So, with the exception of a few things like electronics, why is everything always getting more expensive?
Why does it always seem to cost more today than it did a year ago?
Sometimes substantially more?
Why does this thing we call “inflation” even exist if we are constantly improving our systems, machinery, technologies, materials, and workforce?
The answer is simply…
Debt.
So how does debt lead to price increases through inflation?
Let’s look at it together.
Money Supply
If Zach and Tristan each have 100 coins to spend on their families’ food, they can only pay a maximum price of 100 coins. And, depending on how hungry they are, they will bid up to 100 coins to buy the food.
But let’s say there is only enough food for one family. If Zach has 101 coins, he will outbid Tristan by one coin, thereby raising the “value” of the food by one coin.
Similarly, if Tristan can find another two coins, he will outbid Zach and drive up the cost of the food to 102 coins.
Remember, the central banks are always having to issue increasing amounts of currency in the form of debt, in order to supply the increasing interest payments of the outstanding currency. How and why the Fed does this is explained in the post, “More Month than Money”.
As the Federal Reserve, or any central bank, drops increasing amounts of money into the system, the average person has slightly more money and is able to pay a little bit more than his neighbor, thereby causing the prices to be inflated.
Two people standing side by side in a grocery store will never notice what is causing the price increases and may even work out a solution among themselves to help one another.
But when this bidding is multiplied over the entire population, the effect is certain.
The large population itself provides the huge “auction” that is only represented by our small and simplified bidding war between Zach and Tristan.
Mortgages
The ease (or lack thereof) for people to obtain credit for housing (and everything else) also leads to changes in prices. Credit, the acquiring of debt increases the price of an item, sometimes by multiples.
The ability of someone to outbid his neighbors doesn’t just depend on personal savings; it is also fueled with nitro by his ability to obtain credit in the form of a mortgage or loan.
We have all heard of the “bidding wars” for real estate, especially in the larger cities. This drives up prices very quickly, sometimes more than 10% per day, and actually causes the very inflation that we claim to hate, and that is eroding our buying power every day.
And where do people get the money for bidding up the price? Not from their savings, but…
From their ability to obtain credit.
Debt…
… With interest…
… That doesn’t yet exist…
… So more money has to be issued…
… As debt…
… With interest…
… That doesn’t yet exist…
… And on and on.
And here’s the kicker. The banks have a secret weapon to add even more fuel to the fire to create a financial powderkeg…
Fractional reserve banking.
And we will look at that in the next post.
“The greatest achievement was at first and for a time a dream. The oak sleeps in the acorn; the bird waits in the egg; and in the highest vision of the soul a waking angel stirs. Dreams are the seedlings of realities.”
— James Allen
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