I had two separate conversations yesterday on the nature of inflation… such is the state of my life. It’s one of those topics that’s actually pretty easy to understand, but economists have made incomprehensible. This failure is depressingly common.
Anyway – figured I’d share a way of explaining it that econodorks and non-econodorks alike always seem to respond to.
Money is a unit of measure, like an inch or a foot or a kilogram. Instead of distance or weight, money measures wealth. It is not itself wealth, but only a measure of it; wealth exists independently of money. What inflation does is change the value of the unit of measure, without changing the amount of wealth that actually exists.
I’m about six feet tall. Let’s say I want to be ten feet tall. I can’t actually grow taller, so I’d have to redefine feet and inches. By reducing the value of the foot, I can be ten feet tall without actually having to grow. Put another way, it would take more feet to describe the same amount of height.
As with height, so with money. Inflation means that more dollars are required to describe the same amount of wealth. When new money is printed faster than new wealth is created, each dollar describes less wealth, and the result is inflation.
There are other causes, obviously, but that’s by far the biggest one.
While we’re on the subject, Cato’s annual monetary conference is today. Worth checking out.
Inertia Wins! 