A common objection I often hear to the notion that printing money isn’t good for the economy is the notion that prices haven’t gone up dramatically in the last two years. People who argue this completely miss how inflation works and what the world would look like without the inflation.
Let’s analyze what inflation is, what causes prices to increase, and why prices “haven’t” drastically increased yet. (Spoiler: they really have.)
How Inflation Works:
Inflation is a monetary event. It’s when the money supply goes up. It’s not when prices go up because increased demand for the products — it’s when the amount of money in the system increases. Prices going up higher than before is just one of the often occurring consequences of inflation.
Understanding this is critical to understanding inflation. Those who think inflation is just “an increase in prices” will never understand inflationary economics, which explains a lot about why our economic leaders keep making the same mistakes over and over.
Inflation Isn’t Just About Prices.
Rising prices aren’t inflation — they’re an effect of inflation. Inflation is when the money supply in circulation increases. This is a huge, huge difference. If you’re looking only at prices, then your understanding of the economy and the “monetary markets” will stay superficial at best.
The reason is simple — prices are based on supply and demand. During a recession, prices should naturally drop as people have less money to buy the stuff with. This is actually a good thing for the poor, because it makes products much more affordable during hard times.
The response from the “pro-inflation” camp is absurd. They believe that inflation means higher prices will be good for the “profits” of the companies. They seem to miss the fact that rising prices created by inflation aren’t actually higher profits — they’re just higher prices to make up for the weaker currency.
To understand this more in-depth, you just have to research what makes prices what they are, and how monetary policy affects that. You’ll learn over and over that inflation “helps” the poor the least and hurts them the most — ironically creating angry policies that usually increase government spending and, absurdly enough, more inflation.
Even Then, Prices HAVE Gone “Up”.
Even after saying all that, prices have gone up because of inflation. They’ve gone drastically up. To see why, we need to first turn to one of the most important books in the history of economics… “Economics in One Lesson”, by Henry Hazlitt. He writes:
“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
Those who believe prices are “stable” and that inflation hasn’t been too insane are completely forgetting one of the most important concepts in all of economics — and especially investing: lost opportunity cost, or what prices would have been like without the inflation.
Essentially all economists agree that prices would have fallen for consumer goods had there not been massive inflation. But instead, the government created more inflation, created more debt, and pushed prices higher.
So instead of seeing prices fall since 2008 to help the poor who have been hurt the most, we’ve seen prices go up while “real” returns have dropped. We’re getting the worst of every world. Prices are going up, but money that was saved has lost value — and yet profits are still less, in real dollars.
Some have, of course, asked — are prices going to go through the roof in the future? Honestly, there’s no telling. I don’t believe we’re done. Most of the money created hasn’t fully “hit” the markets yet, and we’re still suffering from stagflation. I think we have massive malinvestment bubbles still in the system. That’s why your portfolio should be prepared for anything — recession, inflation, prosperity, depression — everything.
Of course, all of this is just a basic view — if you want to learn more about inflation, you should read the Inflation Beating Course that I’ve written. It explains in very basic language what inflation is, what causes it, why it exists, and how to beat it. You can learn more here.
Join Over 8,000 Investors:
In less than 15 minutes a week, you'll learn everything you need to know about gold prices, the collapsing dollar, and the real inflation rate.
Thousands of investors have already signed up for the newsletter and are getting the info for free: