23) Inflation and deflation Written by Rainer: rainer.lehrer@yahoo.com Learn languages (via Skype): Rainer: + 36 20 549 52 97 or + 36 20 334 79 74

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Inflation and deflation Listening to business experts and economists is usually an agony and not very informative. One has the feeling that, like in a church, they talk about the unfathomability of God. However, some things in this science are rather easy to explain. What determines the price of a product on the market? Of course the quality and how much of it is offered. This is called supply and demand, everyone, who thinks normally, would answer me like that. But let's take a special case. In our childhood, we all had a shop with a certain amount of play money in the cash desk. Let's say 100 euros and 20 pieces of goods on the shelves. One child played the seller, we divided the money in the amount of cash among the other children and determined the prices of the goods in such a way that all money and all goods could change hands, after which the game started again and another child took over the role of the seller. One day, however, one of the children brought a Monopoly game with him, and even though we tried to add other toys to the amount of goods in the shop, the amount of money, which was added, was so large that we had to record 1000% inflation. The reverse was the case when some play money pieces were lost due to inattentive storage. That was child's play. What does the whole thing look like in harsh reality? How or where can additional money come from? For example, someone has to print money, or, in the age of computer, put a few zeros behind some numbers, or make money from money. One could think of counterfeit money. But that would be too little. Maybe the National Bank? Correct! It is the responsibility of the National Bank to ensure that there is always the right amount of money on the market. If there is too little money in circulation, the bank prints money and buys foreign currency, for example; And if there is too much money in the market, she sells her currency reserves and buys back the country's own currency, depending on how the amount of goods changes on the market. But banks can also make new money. How? If we take out a loan for a product, we have to pay interest on it. With these, the costs of the banks are covered and of course, there is also profit. But there is no new commodity behind this profit, because the value of the commodity for which we had taken out the loan has not increased. When the state needs more money for its household, it can collect that money through taxes, it issues government papers that are first bought by the state bank with new money and then sold on to us citizens. The model listed here is simplified. There are, of course, many other factors involved, but that's basically how it works. John Maynard Keynes, Roosevelt's economic advisor and his catastrophic New Deal program, once said that an annual inflation of 3% is healthy for the economy. The only question is: for whom? If accumulated assets in government bonds are to be destroyed by inflation in order to reduce public debt, it affects us small people too. Back to list!

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