Why Does Inflation Happen?

In my Banking Exams, decades ago, one of the four exams was ‘Economics’, although I cannot remember precisely the context. It might have been called something else to restrict its scope. Somehow or other, I got an ‘honours’ in that subject. That eventually led to my becoming a ‘bank manager’, in that I became manager of a TSB branch. That was because most of my peers could not be bothered about taking the banking exams, and, if they did, they were satisfied to get a ‘pass’. I did not put a huge effort into the studying, but I did have a good mental attitude. My mental attitude was TO UNDERSTAND. You can learn things off by heart, as you do with the times-tables, but you cannot reproduce memorised stuff in response to a question on an exam paper if that question is constructed to test your understanding. I actually read ‘The Radcliffe Report:

The Report of the Committee on the Working of the Monetary System is a report published in 1959 about monetary policy and the workings of the Bank of ……

I was able to quote from that report, which is probably why I got ‘an honours’. Not that I really understood it properly, but well enough.

“Bad money drives out good”.

There are all sorts of ways to interpret that statement. A simple example would be for a Government to reduce the size of a silver coin. Immediately, all the bigger silver coins would be driven out of circulation and be melted down and recreated as the smaller coins.

The penalty for doing so was death. I do not know if people are aware of Isaac Newton’s ‘other’ job. For a while, he was in charge of the money supply. He had people hanged for ‘crimping’ coins. That is, cutting tiny bits of silver off coins.

Inflation diminishes the value of our cash. It is, essentially, much the same thing as ‘crimping’ silver coins. It is like taking a pound note (EH? There is no such thing any more!) and cutting tiny bits of it off every year. Eventually, all that would exist is a tiny scrap. But it would never disappear completely, because inflation is a type of depreciation. It reduces the value of money a bit at a time. It is no accident that France replaced the Franc with the ‘New Franc’ decades ago. It was just a matter of reducing the numbers. But there is sometimes a more subtle intention, which is to cause hidden, criminal caches of ill-gotten gains to be revealed. Banks would be required to question the origin of treasury notes which exceeded a certain amount. “Excuse me, Sir. I am obliged to ask you how you acquired this sum of 100,000 old francs”. The problem for criminal gangs gets worse and worse the greater the cache of notes that they are holding.

But that has little to do with why inflation happens. Does Government deliberately  create inflation to devalue its debts? We seem to be seeing that at this time. The Government has grabbed massive amounts of spending but deflates the value of that debt over time. At the moment, it also pays minimal interest on those debts.

It is not easy for ordinary people, the VAST majority, to protect the value of their money. They just do not have the quantities necessary to get a good deal. In my bank, 30 years ago, we encouraged savers to invest in Unit Trusts. They were the BIG THING at the time. I have no idea what happened – whether those investments prospered or not. I had one myself. When I cashed it in, the ‘produce’ was, like, OK. But, to be absolutely honest, I have no idea whether the money that I paid into the scheme, over a decade or so, was as ‘valuable’ when I cashed the investment in as it was when I contributed it. You would need to continuously monitor inflation and values to know. But what actually happens, and MUST happen, is that we place our trust in the ‘Fund Managers’. They take their cut from the dividends, whatever happens to the value of the stock that your money is invested in.

There is a reasonable argument which depends upon the idea that everything deteriorates. Rocks get worn away by rain. Money deteriorates. A gold coin will not deteriorate. In fact, as gold, it will appreciate in value. That is why there are no gold coins anymore. They would have to be minuscule in size as a medium of exchange. A loaf of bread would cost a microgram of gold, or whatever.

If mice were money, they would become more valuable as they grew, but they would need to be fed. As they aged, they would become less valuable, until they died and became worthless.

Money, as notes, coins or bank accounts is similar.

Should Government stop that deterioration? I amused myself by creating a petition demanding that Gov should ensure that interest rates on bank accounts should never be less than inflation. It got about 20 votes in favour. That is a measure of ignorance. TOTAL ignorance. But, even worse, is that Government actively deteriorates the purchasing power of its currency.

Such activity MASSIVELY influences WEALTH. The poorest people cannot hope to save up enough money to buy stuff. They have to borrow.

Inflation hurts the poorest people. It hardly affects the wealthy because they have their wealth invested in growth industries.

The impoverishment of the poorest people is deliberate. Tobacco taxes, alcohol taxes, sugar taxes, etc, are designed to extract wealth from those who can least afford it and who are defenceless. Even if a person tries to grow his own tobacco plants in a small way, is ‘under suspicion’. That is a new regulation slipped into law via a Finance Act. Apart from me, and a couple of other interested people, no one single person in the UK is aware of that fact. Growing the plants is not illegal. You can grow as many as you want to, but you cannot ‘transport’ the ‘waste’. It really is comical. It is as bad a law as one can possibly imagine.

Finally, there is no reason that money should not buy MORE goods as time passes. I would be happy not to receive a pay increase if I could buy MORE goods with my pay as it is.

The effect is that our day to day savings are not worth doing. We might as well spend every penny as we get it.

Government is supposed to represent THE PEOPLE. It does not, as the persecution of smokers has shown.

I doubt that one MP in ten has any idea that what he/she votes for is leading to surfdom.

 

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