A Visual Guide to Inflation

Very nice! I look forward to the next guide on deflation.
Thanks!

This is a great visual!

However, I think it short-changed the gold standard. It would be nice to explain to people what it is and why some believe we should return to it.

For those interested, check out this article from the Ludwig von Mises Institute to read an argument for the gold standard – even if you disagree in the end, it’s time to admit there are alternative ways of doing it. Perhaps our monetary system isn’t the best design out there or perhaps it is, either way it’s time we debate that.

http://mises.org/rothbard/genuine.asp

Seems like a load of crap. Inflation, in the long term, is purely set by monetary policy. How much money we create determines how much there is to go around. If there’s 1 billion dollars in the economy, people will have $3 each. If there is one trillion in the economy, people will have $3,000 each. If there is one quadrillion dollars, people will have $3,000,000 each, on average. To a first-order, that determines prices and salaries. If I have $3,000,000 in the bank, I won’t work for $20,000/year. If I have $3, I’ll gladly work for $3/month.

lol that was awesome!

Very nice guide and well illustrated. Although I would’ve liked a more thorough explanation of the gold standard. The calls from Russia and China for a partly gold-weighted reserve currency is getting louder every day.

Also, since this isn’t a photograph, don’t use JPEG compression. That’s why you have artifacts around the edges of the letters. For graphics, use PNG or GIF.

I always appreciate these visual guides. Even when I already know things about whatever topic is being discussed, I always end up with a better understanding overall. Thanks, and keep it up!

@facebook yes the conversational dialogue works very well. I would love to see politicians try to explain finance this clearly.

I love how all of a sudden everyone is an expert on the economy and monetary policy………

Inflation is caused by monetary policy. The fed has pumped new cash into our monetary system. There was 800 Billion and now 1.75 trillion provided by the FED just this year.

This in turn is loaned out to consumer as debt and can be multiplied many more times over because of the reserve ratio of only a fractional amount in the bank. So now 1.75 Trillion becomes 9 times more. So we are now being flooded with new currency backed by nothing of value. Causing major inflation. Perhaps hyper-inflation.

The money in your bank is getting more worthless by the day. The scary part is the money is not created from savings or from other assets of any kind. The Fed makes the money out of thin air and exchanges it with the treasury for t-bills debt. Yes your money creation process creates debt to US treasury that is then sold to foreign countries. The foreign countries deposit these T-bills as reserves in their banks thinking they have an asset that is gaining value from the interest on the T-bill but in reality since inflation is lowering the value of the dollar this investment is losing value.

Gold and other precious metals may be the only thing retaining any value as you see it costs more and more dollars to buy gold. This does not mean the price of gold is going up, it means that dollar is losing value.

Excellent visual representation of this abstract concept. We are in a period of deflation, which began June 2008. http://tiny.cc/sbRfz I hope your deflation graphic will point out that deflation is good for consumers. Prices go down. Everything we buy becomes cheaper, including houses, loans, cars.

To think ‘just a few percent’ inflation is good is short-sighted. It means a life savings is cut in half during a career. Inflation is the great ‘hidden tax’, as your graphic points out so clearly.

Interesting, but no explanation of fiat currencies vs. gold (or other real-value commodity) backed currencies.

The causes of the current economic crisis from the Austrian economic theory perspective:

— no gold standard
— fiat money can be created from nothing by governments
— inflation is a tax politicians love
because they don’t have to vote for it
— governments can also manipulate interest rates
— low interest rates make borrowing attractive, rather than saving
— increased debt and leveraging creates speculative bubbles
— the bubbles pop
— instead of taking the bitter medicine, politicians pump
yet more fiat money into the system, and
lower interest rates
— which only postpones the problem, because eventually
— the entire system based on debt and
leveraged speculation collapses
— and desperate actions taken by the government
at this late stage don’t work.

All fiat currencies in history have failed. They are too vulnerable to politics.

Austrian economic theory:
http://en.wikipedia.org/wiki/Austrian_economics

Chris Rowzee doesn’t know what he’s talking about.

Zwief and Mikeee want a bit more elaboration about the gold standard. The gold standard limits the value of currency to the value of a limited commodity, gold. There is actually quite a small amount of gold on Eath. Its rarity and inertness (to chemical reaction and decomposition) make it both a stable currency and element. Countries should not issue more currency than would be required to purchase the gold maintained in its reserves.

In theory, tying the value of a country’s currency to the gold standard would act as a balance to counteract governments printing money to buy stuff it cannot afford. In practice, if governments run into a serious problem with this, they either drop the gold standard, or simply lie about their reserves.

One of the biggest drawbacks to using the gold standard is its mass. It is actually wasteful of time and energy to transport heavy gold around. This makes international trade difficult. Trade deficits would require the transportation of a metal between countries. Of course this rarely occurs. Transfer of gold between governments usually occurs via theft or conquest, each undesirable in its own right.

[Some conspiracy theorists think the US is falsifying its gold reserves. They think that the US government sold off much if its gold after it went off the gold standard. I do believe the US government is lying, but I think the government is understating its gold reserves. Not because it has sold off most of its reserves, but because of the questionable provenance of the reserves it does have.]

The gold standard also makes it difficult to value intangible goods. It is simple math to calculate the ratio of the relative scarcity of gold to the scarcity of some other physical commodity such as wheat, iron, or salt. (Again “relative scarcity” of some commodities varies by geographic region.) Historically, commodity-based currency valuation has depressed the prices of non-tangible goods and services, creating a huge divide between the upper and lower classes. Separating the value of labor and services from the gold standard allowed the rise of the middle class in America.

Abandoning the gold standard has another whole set of problems. Hyperinflation is the most notable. Hyperinflation happened in post-WWII Germany when the allies took the Nazi gold reserves. Hyperinflation has now brought Zimbabwe to economic collapse.

That was a brilliantly done graphic! Solid financial information. Now if our politicians actually understood it we’d be in MUCH better shape.

Uh, when do we talk about the fact that the FED is not a government entity, but twelve regional privately-owned Federal Reserve Banks that have no accountability to the American government? And we are not printing money as a nation, but borrowing it from the printer (FED) with interest? WTF?

The “underlying prejudice” is not “against workers’ unions”, but rather it’s stating a fact about unions having monopolies on labor. If unions weren’t allowed to have monopolies just like corporations can’t, competing unions (and/or single workers) would be a great benefit to the economy and they wouldn’t affect inflation.