Inflation – what it is and why it’s bad

In today’s show, we tackle basic money theory and inflation – what it is, why it’s bad, and more:
+ The role of money as a store of value, medium of exchange, and unit of account
+ Prior to money, you bartered everything
+ One cow is worth how many chickens?
+ If you needed goods for which no one wanted a cow, you were in trouble
+ Enter money – people agree upon money as a medium of exchange. A cow is worth $20. A chicken is worth $2. A wool cloth is worth $1.
+ Money has no worth in and of itself – it’s only worth what it can buy
+ Money is arbitrary – the Federal Reserve creates it and puts it into the system
+ If there were a total of 20 bills printed, and 20 bills used, the system would have no inflation
+ If one day someone created 5 more bills, there would be more money than goods used
+ This is bad, because it means that the system will absorb that money – banks will lend it, etc.
+ Net effect: prices go up – it takes more bills to buy something
+ Just like if ten cows suddenly appeared – you’d have more cows to trade, and someone who wanted to trade with you could say, well, you have 10 cows now instead of one, so you can afford to spend more, so I want two cows for 10 chickens.
+ This is inflation.
+ There’s a disconnect between when more money is created and when it arrives in your pocket to be spent
+ Wages very often don’t keep up with inflation because banks (who receive the money from the government) lend it – and you are paid but don’t receive loans as pay
+ That’s why inflation is very bad – because a seller of goods says, there’s more money available now, so I want $3 for a chicken instead of $2. But you as a wage earner don’t get paid more, so you get poorer.
+ Put another way, $1 will buy you 1/3 of a chicken today instead of 1/2 of a chicken.
+ Controlling inflation is the Fed’s job – but they’re losing control because more of the money is out of their control – a combination of the national debt and things like oil
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