How Inflation Works

Inflation refers to an increase in the total supply of money in the economy. Many people confuse inflation as a broad concept with microeconomics and the laws of supply and demand on prices. While an increase in demand or a decrease in supply can change the price of a good, that is a natural market force. Inflation through the creation of new currency is not.

When the prices of all goods in an economy steadily rise over time, it is not because the demand for them has changed or the supply of them has shrunk. It is because the total supply of money in the economy has increased. When more money chases the same amount of goods, you end up with higher nominal prices.

Imagine you're a collector and bought a 1 of 1, completely unique and valuable baseball card. Next year, the MLB decides to release 10 more cards exactly like yours, making yours 1 of 11. The value of your card greatly decreases because the supply of the card has increased. The same is true for money.

The problem with this mechanism is that most people expend their scarce time, energy, and labor to acquire money. They work regular jobs where they create goods or provide services for others in exchange for dollars or another local currency. If someone can create money at the press of a button, at no cost, and with no labor expended or value provided, it becomes easy to rig the entire economic system.

Inflation Is Theft

Inflation is fundamentally the theft of purchasing power. When you trade your time and labor for money, you do so not because you need the pieces of paper or the digits in your bank account, but because you want to use them to trade for real goods or services in the future. When the amount of real goods or services you can get decreases due to the artificial creation of new money, that purchasing power has been stolen from you.

When the real inflation rate is low, this theft can largely go unnoticed. Even if new money is being printed, if real productivity increases or the number of goods and services in the economy grows, prices can remain flat. But when the inflation rate becomes elevated, people start to notice and take action to avoid being stolen from.

When we look at statistics related to wealth inequality, this theft becomes obvious. Wealth has concentrated in the hands of a small few who have the privilege of being close to newly created money, while the bottom 99% are forced to compete with their time and energy to keep pace. Many of the highest-paying jobs in our society are not those that provide real value to others. Instead, they are grifts where the only goal is to gain access to as much new, cheap money as possible.

Inflation Corrupts Values

Money reflects the values of a society. If money is created dishonestly and with little effort, people earning it will inevitably work dishonestly and with little effort. Inflation incentivizes short-term thinking since it makes the future nearly impossible to plan for economically. Goods are no longer made to last, and an entire culture of resentment grows toward those with wealth because it is assumed they earned it by taking advantage of others, since that becomes the standard.

You cannot effectively plan for 100 years with weak money, let alone a generation. When money becomes truly weak, many people can’t plan past months or even weeks. This lack of economic stability causes people to chase short-term results, short-term gratification, and short-term ideas. The consequences of today’s actions on the next 20 years are not considered, and this can be seen in all aspects of modern life. Food, entertainment, family life, spirituality, budgeting, construction, and healthcare all suffer from this disease of short-term thinking.

When we look at the rise of speculative stock investment, gambling, and "crypto" financial products, the effects of weak money are clear. People feel insecure with only earning and saving, so they are forced to step further and further down the risk curve to get ahead. Many families, who are otherwise hard-working and honest members of society, go bankrupt because they lose it all in these types of activities.

Inflation also creates a culture of indebtedness. Since money becomes worth less over time, borrowing money now will likely make it significantly easier to pay back in the future. This incentivizes people to take out debt for everything instead of buying with cash. You can finance your house and make a "profit" on its price increase, finance your car, finance your education, and even finance smaller consumer purchases. Not only does the interest on this debt make guarenteed profits for the bankers issuing the loans, but the practice of financing everything also leads to a weak and overleveraged society where people are reliant on every single paycheck to survive.

Inflation Punishes Savers

Inflation punishes savers by eroding the value of their money over time. When prices rise, the same amount of money buys fewer goods and services. As a result, the savings people worked hard to accumulate lose purchasing power, making it harder to achieve future financial goals.

Savers often keep their money in savings accounts or low-risk investments, which typically offer returns that do not keep up with inflation. Even if their savings grow, the increase may not outpace the rising cost of living, leaving them with less real value than before. The idea that you need to work twice—once to earn your money and then again to maintain its value—is antithetical to a prosperous society.

In addition, inflation can create a sense of urgency for savers to spend or invest quickly, rather than letting their money sit idle. This can push them into riskier investments or unnecessary purchases, disrupting their financial stability and long-term plans.

Inflation Hurts Wage Earners

Inflation hurts wage earners by reducing the purchasing power of their income. As prices rise, the same paycheck buys less than it did before. Even if wages increase, they often don’t keep up with the rate of inflation, leaving workers with less real income to meet their daily needs. This creates financial stress, as workers find it harder to afford essentials like food, housing, and transportation.

For many wage earners, the impact of inflation is especially painful because they cannot easily adjust their income to match rising prices. Unlike business owners or investors who may benefit from inflation by increasing prices or earning higher returns, wage earners have limited control over their pay. Wages are sticky, and having to negotiate a new rate every year or even every few months is incredibly hard. You productivity likely hasn't changed, but unless your boss has a great understanding of ecnomics, they will likely not understand why you now feel you deserve nominally more money. As a result, inflation forces wage earners to cut back on savings and spending, potentially delaying important life goals, such as buying a home or saving for retirement. This constant squeeze on their finances reduces overall quality of life and financial security.

Inflation Instills Hopelessness

Inflation can instill a sense of hopelessness by making people feel that their financial situation is getting worse over time. As prices rise, many individuals feel that things are harder for them than they were for their parents. The cost of living keeps climbing, but wages often don’t keep pace, leading to frustration and a feeling of being stuck. This creates a generational gap, where the dream of achieving a better life seems increasingly out of reach.

The constant increase in prices also creates artificial feelings of scarcity. People begin to worry that there will never be enough to go around, even if their actual financial situation hasn’t drastically changed. The fear of not being able to afford necessities or future goals leads to anxiety, and individuals may start making decisions based on this false sense of lack, rather than on their actual needs and resources.

As inflation continues, the feeling of hopelessness deepens because it becomes harder to plan for the future. Long-term goals, like buying a home or saving for retirement, seem further out of reach. This leads many to question if their efforts will ever be enough to secure a stable future, creating a pervasive sense of disillusionment and insecurity about what lies ahead. When we look at crimes and deaths of dispair, or the amount of people currently reliant on drugs, or the mental illness epidemic, it is hard to not see a connection with inflation.

What Happened In 1971?

In 1971, President Nixon suspended the US dollar's convertibility into gold, effectively ending the Bretton Woods system and transitioning the world to fiat currencies. This shift marked the end of the gold standard and led to the rise of floating exchange rates, changing global finance forever.