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How to Finally Understand Inflation

Inflation is confusing. It’s darn confusing. In fact, it’s one of the most confusing things that a freshman economics student might expect to face. It’s tricky to wrap your mind around it for a number of different reasons.

So first off, what is it? Inflation is a term we use to describe the general cost of everything going up.

Think about it this way…say I want to buy the newest cool basketball shoes this year. So I go to the store and I buy them, and it costs me a cool $100. (yeah, they cost more than that in real life but I want to use a nice round number so bear with me!).

I wear them for a year…and I eventually wear them out.

So I go back to the store to buy a pair of this years cool new basketball shoes. This year, they cost me $105.

What gives? They cost a hundred bucks…why did they go up? Inflation.

That’s basically what inflation is. When you go to the store and notice that prices seem to be higher than they used to, that’s inflation.

Yes, the government actually sits down and calculates the price of everything year after year to determine the current rate of inflation that you hear reported on the news every night. It’s an incredibly technical and convoluted calculation that they make, and many people question the validity of it (I mean COME ON, how can they POSSIBLY count the price of every single thing in the country!?) and for the most part there is some truth that the number is a little flawed….but it’s close enough to give us an idea of the general price level from year to year.

But WHY is there inflation? It’s easy. Many years ago America went off the gold standard. Back then, a dollar was worth a certain amount of gold. You could take your dollar into a bank and exchange it for the gold that was backing that dollar.

We are no longer on the gold standard. Now our money isn’t backed by anything except the word of the United States Treasury. “A dollar is worth a dollar, trust us!”

Of course, they are lying. Because a dollar isn’t worth a dollar….if I have 100 of them and I hold them for a year, they are no longer enough to buy those cool new basketball shoes, inflation has caused my dollars to not be worth as much.

Why did they go off the gold standard? They did it so that they could simply print as much money as they wanted. Back then, they could only print as much money as they had gold in their vaults to back it up. No gold standard, no handbrake on the printing press.

That’s why people shudder when Democrats get into high political office. Democrats like to spend money on government projects for the poor, for education, and for a ton of other things. Whether you agree with those policies or not is not the issue, what IS the issue is that they often don’t have the money to pay for them, in which case they simply print more.

And anytime we print more money, it causes inflation. That is the only thing that DOES cause inflation.
I ragged on Democrats, but Republicans do it too…just not quite as much.

So the next time you go to the store and find that prices have gone up, thank your President.

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