why inflation happens. Why does it matter how much of our money is printed?
In: Economics
Let’s forget about money for a minute. There’s a whole bunch of goods being produced every single day. Potatoes, computers, 2×4’s, pants, and so on. Each of these goods takes time and energy to produce. Often, also, expertise and equipment. So, instead of having everyone do everything, I can make cars and you can make wheat. Then, I give you a car for an amount of wheat that’s fair (based on how much time and energy each one took to produce).
Now we have an issue. I have a bunch of wheat, and I can’t eat raw wheat. Plus, I also need water, gas, electricity…
So, what? I trade some of that wheat for each of those things? Then I’ll be hopping around all day trying to find someone to make the right trade with.
Instead, we have money. I sell a car for money, and that money can then be traded for anything I want. Money never expires, and is not consumed, so it makes a very good ‘token’ for the time and energy spent on creating something.
So, now, this means that the amount of money spent in a day/week/year/whatever must (roughly) represent the amount of time/energy that is put into doing work by the entirety of humanity. However much money is spent overall must equal the overall labor/production.
So, since labor/production don’t normally change suddenly from year to year (COVID notwithstanding), an increase in the money floating around results in less value per individual dollar.
Ex: There are a million dollars being spent every day, paying for ten thousand man-hours of labor. That’s $100/man hr. Suddenly, that doubles to two million dollars being spent every day, but people are still only working ten thousand man-hours. Now, it’s $200/man hr. It takes twice as much money to pay for the same amount of work!
Latest Answers