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What Really Causes Inflation Rate Changes?

inflated cash wheelbarrow

Quick economics aside here.

I had an idea recently, in line with my observation that non-dividend-paying assets (hello, bitcoin) inflate in price until they go *pop*.

And that is, that it’s the same with a currency.

If a currency pays a dividend, that is, if it pays out new money for new transactions, then it is stable, non-inflationary, and does not devalue versus other currencies.

If a currency does not pay dividends – if, say, it’s impossible to get a loan for anything, or impossible to claim government credits or benefits – then it will inflate and devalue versus other currencies.

This is because new money can only be created in one of two ways –

  • it can be loaned into existence,
  • or it can be paid into existence by the national Treasury, via tax rebates or credits, or social benefits or other government spending.

So you need a generous banking system, or a generous government spending policy, or both – for both prosperity and low inflation.

Policy generosity versus “austerity” – this determines the inflation rate.

This is the opposite of the old view that inflation comes from “too much money chasing too few goods.”

Inflation happens when there’s too little money.

Which is why it’s such a good indicator of an economy’s health.

 

Any questions or comments, I’d love to hear them!

 

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