If Governments use FIAT currency, why do we have inflation?
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In fact, your question assumes a doubt re: the contribution of fiat money to inflation, while *it is* perhaps the most influential factor behind inflation. Why? Simple – what is easier and cheaper to do (and thereby depreciate in value) – minting gold and/or silver coins or printing fiat/paper money?
Do you mean “why do we have inflation in general?” or “why do we have higher inflation right now?”
The main reasons why inflation is the norm come up pretty often on this sub. It’s not an accident that we generally have inflation, governments actually *aim* for a low level of inflation.
Here’s a list of the general reasons for inflation:
* It provides a buffer to help prevent deflation. Deflation is considered worse for the economy and harder to control.
* It encourages people and businesses to invest money productively rather than letting it “sit idle”. This helps increase productivity and grow the economy.
* Long-term public (and private) debt assumes some level inflation. This could be changed over the long-term, but if inflation suddenly stopped, debt would become much more expensive for governments (and many individuals and organisations).
* Governments benefit from “fiscal drag”. This means that things like tax brackets, benefits, etc. tend to lag behind inflation. So, for example, over the course of a year people get higher wage increases to cover inflation, but the government doesn’t increase tax brackets for another year. That means more people will be in higher brackets and the government gets more tax. (Of course, if it weren’t for fiscal drag, governments would just have to increase tax rates or spend less, but this can be a way of taxing more without *looking* like they’re taxing more.)
* There is often a temptation for governments to increase the money supply for short-term benefits. This is controlled to varying degrees in different countries by things like political culture and independent central banks. In general, though, governments ‘mistakes’ are more likely to increase inflation than decrease it.
We value a fiat currency by how rare it is to have it. The rarer it is, the more we value it.
A healthy economy is generally growing every year. Now if the economy grows but the amount of money stays the same, the more valuable money becomes, as the demand for money increases. If tomorrow you knew that your dollar would be worth more than it is today, then why would you spend it? Now imagine that that dollar will be worth much more if you just keep waiting.
All of a sudden you have people wanting to hold on to money, spending decreases across the board, employees get fired to save even more of this valuable money.
This is a much worse situation than just a small amount of inflation every year. This isn’t the only reason why inflation is a target, but it is an important one.
More money chasing less goods leads to your currency being worth less. So whatever your currency is, gold, crypto, silver, paper, etc it has less buying power.
The government backing it doesn’t make it any less susceptible to being inflated, it might make it more likely to be inflated because of poor decisions made in a panic.
Inflation would exist with and without fiat currency.
If we bartered and all of a sudden technology let me process more cotton (cotton Jin) you could see inflated cotton barter prices.
Back to fiat. Your question seems to hinge on fiat being in “use” by the government. I would ask what you think the government uses its currency for because save for a few very meta activities related to money supply and debt financing the gov doesn’t do much. It’s the governments citizens that do the vast majority of activities that drive inflation.
Separately, since your question insinuates that government actions can affect inflation I’m here to tell you that it’s very true that a government has levers it can pull to reign inflation in. But those levers have real world consequences and take time to see in the world so why we still “have” inflation depends on response time and accuracy of data that lead to the inflation finding.
There is no contribution on this sub from anyone with even the most basic knowledge of inflation and its causes.
Because wealthy people and wealthy organizations hoard money chasing a high score. If all the money kept circulating then it would maintain it’s worth. The ultra wealthy however hoard it and poor people still need money. So the government has to print more, which is again hoarded and then more is printed again.
Because the money supply continually increases.
This is done through the Federal Reserve.
We could stop inflation tomorrow if we wanted to. Heres the rub, the economy is a complex machine with lots of moving parts. The same levers that control inflation also affect our economies growth, productivity, etc. We could mess with those levers to completely reduce inflation, but we would destroy the economy at the same time. The trick, which is hard, is to keep inflation at a pace that is considered good, while also keeping the economy going in a place that is considered good.
Government have infinite money glitch which devalues our currency to basically be worthless.
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