What causes Inflation? (BEWARE THIS ARTICLE IS FILLED WITH ERRORS)

This article is from a link from
http://www.kamron.com/economics/inflation.htm

The material in the right column in blue type is this website’s response to the article. [1]

What is the cause of inflation?

The standard answer is uncontrolled printing of currency. [2]

The presses spit out money and the currency increases, while the goods available stay the same. This results in more currency units for the same goods which decreases their purchasing value. In the current fiat debt money system this is not the whole story.

What is not discussed is how the money is inserted into the system. Who spends it into the system first? What is the cost of this money to the first spender?

Money, currency, credits in all forms can only increase by being loaned into the system. [3]

Let me state this again. The only way the exchange medium, the dollar, can increase is for someone to borrow the money into existence. Most of these loans are debts that need to be paid back, and, there is interest charged for the time loan. Now here is the real problem. The interest charged is not loaned into the system. This fact is the most important piece of data you never learn about our current financial system..

If and when these loans are paid back to the original spender then the cash in the system decreases accordingly. When the debt is created with the cash they offset each other to keep the books balanced.

There is no net gain of currency that waters its own value down. This is a shocker isn’t it. All your life you have been told that inflation is the increase of currency, [4] but it is not. Inflation is the increase of debt over the availability of cash. Debt from the interest charged on the loans. There is no cash created to offset this increasing interest debt. [5]

This is a moronic system created to transfer wealth from the borrowers to the lenders.

To understand our system lets take an example. We start a brand new country out with a financial system like Federal Reserve System. The FED loans $100,000.00 into existence either to the government in exchange for bonds or a member bank as a ledger credit. For our study lets say the loan is done at 10% interest.

In example (1) we will let the borrower just add the accruing interest to the loan. Look what happens to the debt verses the actual cash available to pay the loan and interest. [6]

Loan Example (1)

Initial Loan $100,000.00
Year ..Total Debt....... Interest rate .....Interest........... Total cash ...........Deficit $
1 .....$ 100,000.00 .........10%...........$10,000.00....... $100,000.00 ........
2 .....$ 110,000.00 .........10%...... ....$11,000.00 .......$100,000.00 ......$10,000.00
3 .....$ 121,000.00......... 10%.......... $12,100.00 .......$100,000.00 ......$ 21,000.00
4 .....$ 133,100.00 .........10% ..........$13,310.00....... $100,000.00...... $ 33,100.00
5 .....$ 146,410.00......... 10%.......... $14,641.00....... $100,000.00...... $ 46,410.00
6 .....$ 161,051.00 .........10%...........$16,10510........ $100,000.00...... $ 61,051.00
7 .....$ 177,156.10......... 10%.......... $17,71561 ........$100,000.00 ......$ 77,156.10
8 .....$ 194,871.71 .........10% ..........$19,48717 ........$100,000.00 ......$ 94,871.71
9 .....$ 214,358.88 .........10% ..........$21,43589 ........$100,000.00 ......$114,358.88
10 ...$ 235,794.77 .........10% ..........$23,57948 ........$100,000.00 ......$135,794.77

[1] This is irrational, disjointed and poorly presented. It shows that (a) an interest-bearing loan creates a deficit of cash in the system. That is said (b) to cause inflation.

Both a & b are nonsense --- What really happens is simply that in all cases, wealth or cash equal to the interest is transferred from the borrower to the lender.

This all ignores what the borrower does with the money he borrows. If he buys seed with the money and raises crops -- he has created wealth in the form of those crops -- that wealth is traded for any other form of wealth --- including diamonds or whatever -- or for a cancelation of the debt owed to the lender. At the end of all transactions -- no new money is created or lost within the system. Wealth is created or lost -- but not money.

If new wealth is created and the loan is paid back -- the result will be deflation -- because the money stays constant. If the wealth stays the same -- there will be no inflation or deflation.

If, through a depreciation of wealth , the total wealth is decreased -- there will be inflation.

So, in total -- there can be inflation or deflation or neither -- depending on a number of factors.

[2] That is not “the standard answer” it is only one reason for Inflation. Infllation, or the reduced buying power of cash can be caused by all sorts of things including a reduction in the amount of goods available. It might be an interesting exercise to list all the possible sourcs of inflation in an economic system --- I will bet there are 10 or more logical reasons for inflation.

[3] Not true -- money can be spent into the sysytem if the government that runs the system uses the money to pay for services or products used by that government. I am certain there are at least 20 sensible ways money could be inserted in a system. For instance the government can run a lottery and simply give the money to the lottery winner. Or the government can use the money to pay for roads, waterways, airports, healthcare, social programs, infrastructure development, exploration, education, scientific research, or whatever.

[4] Who has been telling us all that for "all (y)our life" -- not anyone with any sense.

[5] What about money that is spent into the system?

[6] This is total nonsense for a few reasons. (A) It sets up a premise that does not happen in a real-world sysytem. (B) Money is not only lent into the system -- it is also (C) spent into the system if the people involved have any sense. (D) Interest does not usually cause any deficit of money.

TO SUM UP:

Wealth will naturally increase in every system where new wealth is created from natural resources which are not booked as wealth until some person turns them into products for sale in a market.

Wealth will naturally decrease through depreciation or waste.

Money can increase by government spending of new money it creates.

Loans do not increase the money supply over the long run -- because loans are usually paid back and that extinguishes the borrowed money.

Inflation or deflation happens as a result of the interplay between all these factors and a bunch of other things.