Inflation

Inflation comes from an excess of money. Imagine an island with five people living on it. They have 100 gold pieces. If one person kills a wild boar, a share of the boar is one gold piece. If someone helps you build your hut, you pay them one gold piece per day. But then, someone discovers gold on the island. Suddenly, there is 1000 gold pieces on the island, not just 100. That same piece of boar's meat is now going to be 1/100 of the new money supply, or 11 gold pieces. Of course, if the weather is terrible, you might be willing to pay a greater portion of available funds for shelter, and if you just filled up on fruit you might be unwilling to pay for meat. But all things being equal, you will pay a certain portion of what you have for your needs, and if the people have more money they will spend more money and prices will go up.

But we aren't on an island, and we don't keep discovering more gold. Our money comes from the government controlled banking system. This central banking system loans money to banks at a set interest rate. The banks mark up that interest rate so they can make a profit, and make loans to businesses and individuals who, in turn, buy things with it or invest it. If the central bank lowers interest rates, money seems cheap to borrow and people respond by taking out loans and putting money to work in our economy. However, this increases the amount of money in circulation and drives up prices.

Question: why would our government take actions like, say, sending free money to everyone, when it will drive up prices? Answer: because America is wretchedly in debt. If we took everything everyone on the planet produced for two years, we might be able to just pay off what we owe. Do you think the whole planet would mind donating their productivity? No? Well, then, let's make our money as worthless as possible. Inflation means that we can pay back our debts with dollars that are worth less than the dollars we borrowed.

Let's say I borrow $1000 to buy a cow and that cows cost $1000. Then, let's print more money so that the value of the cow is now $1500 (the value of cows being one billionth of the total money supply). I can now sell that cow and give you back your $1000 and pay you back--with 3% interest--and you still won't have enough to buy a cow any more. Inflating your currency is a way of getting out of returning borrowed value. Stealing, in a word.