Originally Posted by Bristoe


The value of a currency is determined by the quantity of currency in circulation.

That's not really true. The value of currency is determined by how much people THINK it's worth. Think of it in terms of gold, is the price of gold only determined by the quantity out there?? Of course not.

Every dollar put into circulation makes an existing dollar worth a bit less.

Again, think in terms of gold, does every new ounce of gold mined make all the existing gold worth less??

Essentially, inflation is an invisible tax. When the government needs money, the Federal Reserve just adds it to the government's books. It creates money out of thin air.

That makes the money that's already out there worth less.

So,...when the Federal Reserve prints up a few hundred billion dollars and gives it to the government, you still have that $20 bill in your wallet, but it will only buy what $19.50 would before an additional huge lump of money was printed up by the Federal Reserve and given to the government.

The Federal Reserve extracts the value from your money by simply printing up more of it.

That's inflation.


You're correct, that is one way inflation is created, but it is not the only way and it is not absolute. That type of inflation is called demand push inflation......when you have too many dollars chasing too few goods. But what happens if the government "prints" a bunch of money but nobody spends it?? What is the effect on inflation then?? This seems to be why the latest surge of stimulus money hasn't created surge in inflation. Is it permanant?

The other type inflation is cost push that occurs on the supply side. This is the type of inflation that is generally associated with stagflation. This happens when an economy gets an external shock on the supply side that drives up costs. An example of this was the arab oil embargo of the 70's that drove oil prices up and sent shock waves through the U.S. economy. This was a case where we had low growth rates, high interest rates, AND high inflation rates (as measured by the consumer price index of course). That's why I say that the article posted at the top of the thread doesn't make much sense to me because we don't have the same type of conditions that we did when the term "stagflation" was coined.