I do not understand how inflation works if my life depended on it. I understand that it’s an occurrence when you have something in excess amount (like money), thus it becomes worth less.
But why does it become worth less when we give money value? Could we not assign the same value to the same things we have in an excessive amount? Is inflation a law of sorts?
It’s so confusing to me.
In: Economics
Okay, I’m sure you understand supply and demand, right? Well, one reason for inflation is there is a certain amount of the money supply in circulation to satisfy the demand of a given population.
But the population keeps increasing consistently over the last several decades. So now there is *less* money per person unless you increase the money supply. And if you increase the money supply, you get inflation.
And that’s a good thing. Otherwise, those with vast sums of money could horde it over time since less money would be available for more people, thus increasing their net worth by simply holding on to the cash. BUT if you take that money out of circulation, there is even LESS money, and you get a runaway depression.
**Second**, inflation helps nations pay off huge debts. Since nations don’t think on human lifetime timescales, they can use decades to play with debt. So, if they take out a debt now, inflation can eat away at that debt over centuries even if payments are not made. I’d be like if you took out a loan in 1960 to buy a brand new car for $2,500. That loan then provided a huge service to you, and time would have made the principle a tiny sum by today’s standards. Well, nations can do that since they can think in centuries, not years.
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