November 22, 2014

Money and Inflation.

                Money boils down to a medium of exchange and how much that dollar or Euro can get you is what the people in society value have that unit of exchange. Most economics class I have been in says that if the money supply is not increasing by 3% each year then our economy is not growing how it should. But let us think. If a dollar is just a way to exchange goods easier then why would the value of the dollar going up be such a terrible thing, and us purposefully devaluing our currency be good?
                If we just had a finite number of dollars in society, when more people want to use the dollar for exchange purposes the demand for the dollar when up, so its value went up. This would be called deflation. Most economists are scared of any kind of deflation because then they say there is less money to go around. But in a real economy, it checks itself often and corrects for this mistake. So if the value of the dollar goes up, then it would be more expensive to pay people the old wage they were used to, so wages would have to first go down. This is where the USA usually messed up, the government doesn't let or highly discourages companies from decreasing pay, hours, or anything which just doesn't add up. But soon after the workers loose a portion of their wages they realize deflation was across the board, so if they got a 10% pay reduction, they will most likely go to the store and by their groceries for about 10% less than their old cost.  
                Money is not the economy, the economy is the network of people that is working together to build products, deliver services and pay for these. This doesn't directly relate to money/currency at all. So we could just let deflation/inflation happen as they will and don’t get government involved. There will always be ups and down based on population or desires to save at the time, but they will level out when you look at it long term. Inflation in the end just devalues currency and punishes savers.


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