Inflation Is For Supremacists

Let's imagine there is a small sovereign community of 4 industries:

T: Tools

U: Utilities

H: Housing

F: Food


and say each industry needs to sell, for units of money, 100 per month, to the other 3 industries, each industry earning a money amount of 300;

and each industry needs to buy from 3 other industries, to procure all the necessary items for all the 4 industries to thrive better together, each industry spending 300.

T sells 300 to UHF; T buys 300 from UHF;

U sells 300 to THF; U buys 300 from THF;

H sells 300 to TUF; H buys 300 from TUF;

F sells 300 to TUH; F buys 300 from TUH;

300 minus 300 is 0.

The above explanation intends to show how money exchanges between industries. There is no inflation in this example because all 4 industries split their money equally.

Yet in reality, people don't share money equally.

In order for few people to have a lot of extra money, many people must operate with not quite enough money.

Let's imagine this small sovereign community from the perspective of our current reality: say there are 1,000 people in a workforce.

 

$300 is the price for each person to buy what they need in 1 year.

 

If all is equal, by year end, $300,000 is spent and $300,000 is earned.

 

But all is not equal. The superior class takes the lion's share of the available earnings.

 

100 people get paid $450 per year.

 

900 people get paid $283.33 per year.

 

900 people need an extra $16.67 by year end.

 

100 people have an extra $150 by year end.

 

(Also consider, money originally gets put into circulation as a loan from a bank, to businesses, and to individuals, as a principal amount, and the bank will try to collect the principal amount plus interest, or try to foreclose on properties whose secured debts are not paid.)

 

At the end of the year there is savings of $15,000 and a deficit of $15,000.

 

The 900 people will need to get credit cards, mortgages, or other loans to cover their expenses of $300.

 

If the 100 people spend all their $450 in the course of the year, and all else is constant, there is $315,000 spent, and it will then take $315 for everybody to buy what they need.  

 

The net prices of everything people need will have risen 5% in the course of the year.

 

After so many years of this, when the loans cannot be repaid, more loans can be made to cover the shortfall, or loans can default, the debt can be repudiated.

 

This hypothetical example is described, to simplify what this blogger sees, as loans upon loans, which have allowed inflation for centuries, through the industrial revolution.

 

Stock, bond, future, and other speculative markets are instruments to absorb inflation, tie up savings to delay their expenditure in the market place for necessary goods and services.

For deflation to occur, loans can default, and/or, instruments such as stock, bond, future, and other speculative markets can be sold off.