Today we are going to talk about the most popular topic (as far as in my opinion) in the economic field is concerned, yes, inflation.
Whether you know it or not, I must tell you, you have always lived linked to it since its variation affects or against our life. Today we are going to see what it is and explain it simply. Well, let's get to the topic.
If we go to the meaning of a dictionary, it will tell us that it is the excessive increase of something, and yes, it is so but this is a concept that encompasses much and at the same time little.
While it is true, that inflation (in economics) is related to money, it is not only reflected in the excessive increase in physical quantities but also in the decrease in productive backing.
Let's go with the practical examples. Many may have been taught the theory of inflation with the example of having 1 coconut and 1 $1 bill, while such an explanation is related, it is not a necessary one for someone who needs to learn.
So, let's look at it this way:
We are in a country where with 1 dollar I can buy 5 pounds of beans, this is called purchasing power, the ability to buy with 1 dollar, "x" amount of a product.
鉃★笍 If the production of beans falls, it causes a shortage in the market for beans, which leads to the need to pay more to get the same amount of beans.
Now, another example, keeping bean production the same, with a starting ratio as in the beginning (1 USD = 5 Lb Beans).
The Central Bank of that country decides to increase wages. This disrupts the market. By having more money, people will be able to buy not only 5 pounds but up to 7 pounds because they have more capital to spend.
So far so good. The problem is that since there is no increase in the production of beans, they are going to run out faster than before because consumption has increased, therefore, the price of a pound of beans has risen.
And here, ladies and gentlemen, I present to you, the inflation.
While it is not a difficult concept to interpret, it is very difficult to beat in practical life, but well, let's keep talking.
Why do Central Banks and the Federal Reserve print more and more money if it affects the economy?
Imagine you have a capital of 300 Million Dollars, and suddenly a war conflict happens in your country. Hundreds of agricultural fields, stores, and other productive means have been damaged.
As a result, business owners are going bankrupt because their production has dropped to a minimum and they have spent their capital to rebuild their entire business. This affects the people, because as I explained above if production goes down, the price goes up, therefore, the consumer price index has skyrocketed.
What to do?
Let's suppose that in total, the Enterprises need 500 Million Dollars to rebuild themselves, and you as the manager and central controller of the country's finances only have 300 Million, then, you have to print more currency.
I want to clarify one thing:
Printing currency does not affect inflation until that currency enters circulation in the financial system, I can print 100 Million and never take it out, therefore, it does not affect the Economy.
In addition, once these currencies enter into circulation, it takes some time for the change to settle and produce the effects. We continue.
Once you print the extra 200 Million, you will be able to give an injection of capital to the companies and they will be able to start rebuilding.
This is the "good" part, as far as it goes, of inflation, the ability to expand to increase production.
In the short term, the 200 million we have injected will only be reflected in the companies. In the medium and long term, other changes will be seen, but, as we are coming out of an economy in destruction, this will make up for it.
Now, the worst part is when a government decides to print more currency to settle its debts with an entity or another state.
Here you are printing currency not for injection but for liquidation. This affects inflation in the same negative way. For this example, you have to visualize it with a currency with global usability like the dollar, in which inflation is not only seen in the US consumer price index (CPI) but in the overall value of its currency.
馃敻But what can be done to curb inflation?
鉃★笍 Rising interest rates. The interest rate is the percentage to be paid back for requesting a loan from a bank, as these increase, the higher the money to be paid back and the lower the amount in circulation.
It also has its negative effect, since the person who has contracted the loan, has to pay more, therefore, in a short term he would have to generate more money, either by increasing the prices of his business or by working more (in case he does not have any business).
This is a rather drastic measure in the short and medium term, but in the long term, it will raise inflation.
鉃★笍 Cutting the amount of currency in circulation. As I said, no matter how much money has been printed, the total amount in circulation is what influences inflation. Measures such as increasing the cost of transactions, burning coins, and raising taxes, among others, are a bit more light-handed actions to deal with the inflationary phenomenon.
I have talked about cases with a neutral environment so that you have been able to understand what inflation and all that surrounds it are about. I have also dealt with the issue in a general way, as all measures can be combined and even taken out of the book. I have also limited myself to explaining other interactions that affect the logistics and distribution of products, but that will be for another time.
It all depends on the governmental decision and the type of economy present. I hope you have understood, see you next Sunday 馃馃徎馃馃徎.
