Ya'll,
So I was thinking about inflation recently, and I don't think I really understand how it happens. I've tried to think about how I would explain it to somebody who had zero experience with economic thought.
Background: At any given moment in time, an institution (the Fed?) increases the amount of currency present within the economy. Prices go up, of course, but more to the point people are economically damaged by this.
Question: Why?
Stupid answers: In a simplistic fashion, prices will adjust and everything should even out again, right? If prices are $1 before and now $1000, well shoot, let's just make $1000 bills. Not a problem. It's all relative.
Answers, from what I actually know:(1) Savings are harmed, such that your $1 in savings is now worth $0.001. This is wealth destruction.(2) The market cannot react quickly enough. That is, most businesses are not able to anticipate what prices will do, only react to what they are doing. Thus, if someone continues to price their goods / services are $1 for a time, every day that he is not adjusting his prices upwards results in giving away goods / services for less than what they are worth --> failure.
Am I on the right track with all this? I know this is all very superficial, but I'm not an economics student, and have almost know time to understand the fine details of all this.
Best Regards,Tele
Telemachus:(2) The market cannot react quickly enough. That is, most businesses are not able to anticipate what prices will do, only react to what they are doing. Thus, if someone continues to price their goods / services are $1 for a time, every day that he is not adjusting his prices upwards results in giving away goods / services for less than what they are worth --> failure.
Mises said that an important aspect of economic calculation is a sound currency, what this means is that entrepreneurs need to be able to correctly account for their profits and losses. If inflation is high it is also less stable and predictable, this means that entrepreneurs may be making losses and report large earnings. Which is actually what we see, especially since accounting standards aren't very high at the height of the boom.
The other important point to mention is that when the Fed induces inflation it usually does so through commercial banks and FRB, ultimately resulting in the boom bust cycle.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
GilesStratton: Mises said that an important aspect of economic calculation is a sound currency, what this means is that entrepreneurs need to be able to correctly account for their profits and losses. If inflation is high it is also less stable and predictable, this means that entrepreneurs may be making losses and report large earnings. Which is actually what we see, especially since accounting standards aren't very high at the height of the boom. The other important point to mention is that when the Fed induces inflation it usually does so through commercial banks and FRB, ultimately resulting in the boom bust cycle.
Huh, I hadn't thought of it in purely accounting terms. I'm thinking of the case where a company produces, say, widgets at a cost of $10 per at a given moment in time = t2. Total costs per widget prior to this moment, at time = t1, were $5. However, the company is unaware that the currency has inflated severely such that $10 at time = t1 is now only equivalent to $4 at time = t2. Thus, in real terms, the company will lose $6 (time = t1) for every widget that they sell, but be showing a profit of $5 (time = t2).More realistically, the company would simply not realize that it is only earning a profit of, say, $4 per widget, not $5. So then, thinking that they have $5 worth of profit to invest in the company, they really only have $4, and are therefore exposed to spending more than they actually have. Or is it more that they report certain assets to lenders, and the lenders give them $20 credit with the $5 assets as some sort of collateral (am I using the right terms?) when really only $16 credit is justified? If the company fails, then the lender would be met with an unanticipated extra amount of debt that can't be paid back.
Is this what you are talking about, or am I totally off track?
Regards,Tele
Telemachus:Is this what you are talking about, or am I totally off track?
Yes, that's essentially the point I was making.