Hi Sup Forums, I was I'm debating with a friend on inflation and purchasing power and want your help.
Why does purchasing power diminish over time? I understand inflation but something about the whole system doesn't add up. I can live in 1950s America, put in 1 hour of labor to make 1 dollar and buy 5 gallons of gasoline with that 1 dollar right away. But if I hold on to that dollar, wait until 2000s, I can barely buy 1/3 of a gallon of gasoline.
Now, I understand that there are factors to attend here, namely that gasoline is a limited resource and there may be a much higher supply/demand in the 1950s, but what if we take something that should cost less over time, say clothing? If I lived in the 1700s, before the invention of the cotton gin, grew my own cotton, made a sweater out of it, I make a nice little profit. I could buy back that sweater right away. I should, in theory, hold on to my money, wait until there are more efficient ways to make clothing (due to technology - cotton gins, farming equipment, etc), and then use that spending power to buy 100 sweaters. But I can't. The purchasing power is still LESS! I think about what money is... it's supposed to be a means of trading wealth and value. We use fiat currency instead of a bartering system so that we can (1) efficiently trade one labor for another (it's more efficient to leave the farmers do the farming and for me to do whatever it is I specialize in), and (2) so we can hold onto this spending power so we can cash in the fruits of our labor at a later time. But the system we have breaks (2).
Where does this spending power go? Help!
My theory is that money is being printed into the system that devalues the money I won. Naturally, if I have $100 in a system that has $1m in circulation, and the gov't prints $10m, then my spending power goes down to almost a tenth of what it once was. But I don't know if this is actually the case.
>Why does purchasing power diminish over time? Supply and demand. The greater the demand, the more the supply has to compensate to return to an even level with the demand.
The greater the demand, the lesser the supply. Hence, the purchasing power for the demand decreases as the price of the demand rises, due to the low supply.
The higher the cost, the more "power" (IE high monetary value) the prospective purchase must contain.
Please read my second paragraph.
More people and inflation. There is way more money in circulation now so it's worth a lot less
>but what if we take something that should cost less over time, say clothing? If I lived in the 1700s, before the invention of the cotton gin, grew my own cotton, made a sweater out of it, I make a nice little profit. I could buy back that sweater right away. I should, in theory, hold on to my money, wait until there are more efficient ways to make clothing (due to technology - cotton gins, farming equipment, etc), and then use that spending power to buy 100 sweaters. But I can't. That's because most people don't think in terms of what the future holds, but rather what's going on in the here and now. Sure, you might have foresight, but most don't. Hence, the economy will adjust to how most people function.
But just because there is more money in circulation doesn't mean that the value of MY labor should go down. If I put in 100 hours of labor and am able to buy 100 pieces of fruit with it right away, I should be able to buy MORE fruit at a later time due due to the efficiency of fruit production going up over time (due to technological advances, etc). But instead I have LESS. Why?
Your dollar is worth less because you didn't spend it. Due to the nature of our money system, money is always losing worth.
This is because all USD are on loan from the federal reserve. It is loaned to banks, which use it to finance mortgages, investments, and various other bank activities. This is how it circulates to the public. (Via purchases with loaned money)
This means that every dollar in existence constantly requires a specific interest payment from some bank to the federal reserve. To pay this, they take out more loans from the federal reserve in new money.
Since the pile of money is constantly growing, it is becoming less and less scarce. Because the pile is growing faster than the economy using it grows, the currency deflates.
If we had natural value increases on the order of 5% then we wouldn't have inflation, because the banks would be able to pay more of their interest off of profits from investments (earned off of other parties) and loan out less money from the federal reserve.
TL;DR: The value of the dollar is mostly represented by:
(value of economy) / (total money)
Because the fed loans money out, total money is always increasing. Unless value goes up *faster*, money will devalue over time.
if you held that dollar in a bank the interest would be insane.....
"should" doesn't change why it works the way it works now. That's how it is.
You can argue for another system, but the OP was coming from the angle:
>I don't understand why this happens
Also, true-value currencies can work, but have the problem of volatility of their own value. For example, gold is quite volatile, and many high-value goods are impractical to use as currency directly, like oil or food.
You could make a paper currency based on something like that without it being a fiat currency. For example, you could have 'crudes' which get you, say, 1L of crude oil at a specified exchange.
A fiat currency has no intrinsic trade-in value. That allows its value to be controlled and manipulated much more easily.
Inflation and more money in circulation.
Economics is not a hard science my man. Don't expect it do be constrained by laws.
>There is way more money in circulation now so it's worth a lot less
This is my biggest problem. Why do we not have a constant amount of currency in circulation to begin with? Things would be far more efficient that way, wouldn't it?
As an example, if someone comes along and finds a more efficient way to to produce something, the price of that thing would be lowered. Then by the free market that guy's business should flourish. But the way we have things now, it seems like instead HIS prices for his products remain constant the the total amount of money in circulation goes up. That essentially is like stealing from everyone else.
Inflation is essentially an invisible tax. It's not inefficient so much as a transferral of power.
The value isn't disappearing, it's ending up in the hands of the federal reserve.
To clarify, if you want a cut of the fed's inflation money, buy bonds: (The fed is privately owned, so profits go to investors, not the public)
>My theory is that money is being printed into the system that devalues the money I won. Naturally, if I have $100 in a system that has $1m in circulation, and the gov't prints $10m, then my spending power goes down to almost a tenth of what it once was. But I don't know if this is actually the case It is.
>It's not inefficient so much as a transferral of power.
That's essentially stealing, isn't it? All transferral of power should be consensual. What's the difference between that and stealing?
If the economy had a fixed amount of money in it then prices would be dictated by the amount of labor or resources needed to produce a certain product. Prices would stay static (baring supply and demand influences) unless new money is introduced (printing money, globalization, ect). We have a unique economy now days where there's dozens of outside influences, such as the fed printing money, trade deals or investments with other countries, or even people understanding they can get a much higher asking price for their product through artificially controlling supply.
Basically, you're right in your post that new money in the system devalues your current money
Again, you keep bringing up "should". This is what is happening. None of this is conspiracy. This is publicly available, verifiable information.
I think it sucks. You think it sucks. So what are you going to do about it?
Also, the man with the more efficient production can run his competition out of business then achieve a monopoly where supply is easy controlled. You then pay what he asks, not what the product is worth, which devalues your money, especially if that product is an essential item.
>I deserve a raise just because I've been doing this job for a long time even though my productivity hasn't gone up >Why does each dollar I get buy less?
>put in 10 hours of labor >that labor is worth 1 hour 50 years later
>I understand inflation
>My theory is that money is being printed into the system that devalues the money I won. Naturally, if I have $100 in a system that has $1m in circulation, and the gov't prints $10m, then my spending power goes down to almost a tenth of what it once was.
Good job user, you do understand inflation.
You can do this regardless of the currency used. Monopolies are actually very effective and damaging, which is a big reason why they're illegal. (Mostly)
productivity has been going up steadily for decades, real wages have barely budged during the same period. The people to blame aren't normal people who want raises, it's the ((bankers)) who basically create an endless supply of money in a positive feedback loop via fractional reserve banking and other tricks
MORE! Please post everything you have on this
Look up fractional reserve banking. Every dollar anyone puts in a bank can be loaned out 9 more times.
When the bank loans the money to someone else, and that person starts making payments, that new money can again be loaned to 9 times over.
It's the greatest scam ever invented.
You want the TRUTH, you can't handle the truth.
>What's the difference between that and stealing? One is perpetrated by Jews and you'll be accused of antisemitism if you try to stop it.