The Second Part of the Catastrophic C I R triangle: Inflation

Finance from Scratch: A detailed article on Inflation

Anatomically speaking, the naughty kids called humans have been playing around on Earth for the last 300,000 years, but till now they haven’t been able to achieve desirable concepts like Utopian Perfection and Utopian Society.

For those who are unfamiliar with this theory, here is a synopsis of the same:

A utopian society is a theoretical community or society that is considered to be ideal and perfect in terms of its social, political, and economic organization.

It is often characterized by a lack of poverty, crime, inequality, and other social and economic problems, and a high degree of equality, fairness, and happiness.

The concept of a utopian society has been popularized in literature and other forms of media, and it is often depicted as a perfect world, free from the problems and issues that plague contemporary society.

As mentioned earlier, the utopian concept is quite desirable and fascinating, but till now humans haven’t been able to reach the kind of perfection fantasized by the philosophers of the past.

The obstacles that are coming in the way of such fascinating results are uncountable, and sitting down to count them all is nothing more than an inappropriate use of time, money, and human resources.

We can’t count them all, true.

But we can name some of the prominent factors that have prevented humans from achieving the concept of Utopian Society.

Making its way to the top of the list is none other than Diseases.

Over the past few decades, humans have learned more about nature, science, and human science and gained insights that are hard to imagine. However, despite all these advances, they haven’t been able to find a permanent cure for all the diseases that exist on Earth’s surface.

Back to where we left off before, taking up the second place is Human Greed, third place Corruption and the fourth place, which is a byproduct of the former two, is Poverty.

Human Greed and Corruption are incurable, unpreventable, and unpredictable. There is no permanent solution for them, but what about poverty?

Poverty is just a lack of money, right?

Theoretically speaking, Poverty refers to a state of being in which a person or a community cannot afford basic human needs such as food, clothing, and shelter.

It can also be regarded as a multidimensional concept that includes not just a lack of income but also a lack of access to education, healthcare, and other services.

At the end of the road, we again reached the same conclusion as before.

I.e., poverty is something caused by a lack of money.

Then what can be the solution to such a problem?

The answer is quite easy: ask the government to print more money and give it to everyone.

If you make everyone rich, there will be no poverty, and humanity will be one step closer to realizing its utopian dream.

But here comes the problem: real world economics doesn’t work like that.

Utopia and utopian concepts are baseless, unachievable, and illogical fantasies.

Greed, Corruption, Generosity, and Benevolence are different sides of human character/personality. 

One can’t be separated from the others.

Greed can be suppressed or controlled, but it’s totally impossible to erase it from the human mind. After all, we are living in a materialistic society, and greed is one of the sources fueling the development of society and humankind.

Now that you are aware that printing more money is not a solution, have you wondered why it can’t be one?

Those who know the answer will say it will create hyperinflation or inflation, but for those who aren’t clear, follow me till the end to understand the concepts.

First of all, I would like to introduce the concept of supply and demand.

In layman’s terms, supply is the amount of a good or service that is available and offered for sale, and demand refers to the desire for a good or service, as well as the ability and willingness to pay for it.

Now that you are clear about this basic concept, let’s move on to the next phase by drawing an example from our day-to-day life.

Imagine that there is only one shop in the city that sells potatoes to the entire city. The shop owner has a surplus of stock, and that’s why he is selling it at an affordable price.

Now consider the following scenario: the bridge connecting the city and the outside world has collapsed, and the city has been cut off from the outside world for one month.

In such a situation, the shop owner can’t refill his depleting stock of potatoes, and potatoes have become scarce in every household.

In other words, there is high demand and low supply, which would result in a sudden spike in the price of the potatoes. The price would only come down when everything goes back to normal.

Moving onto the next example, imagine a situation where the shop owner received ten times the amount of potatoes for his warehouse.

Under such a condition, he can’t keep it all in the warehouse due to storage unavailability, so one way or other, he would be forced to sell all the potatoes at a much cheaper cost than the usual price.

In other words, an inflated amount of supply/high supply and low demand would bring down the price of the goods and services, like the potatoes, in the current example.

I’m sure that by now everyone must be clear about the supply and demand concept. To increase your understanding of the same, let’s draw a real event’s example from the past.

In the 1920s, Germany was struggling to pay the large reparations imposed on it by the Treaty of Versailles after World War I.

To finance these payments, the German government printed large amounts of money.

Massive supply of money and near negligible demand resulted in hyperinflation.

In other words, the government’s action inflated/increased the amount of notes in circulation, similar to the second example of potato given above.

Aside from increasing the supply, the cost of living, food, and other basic necessities went up by a lot.

When there is more money in circulation, the purchasing power of each unit of currency decreases.

In addition, in the case of Germany, demand was high from the consumer side, but goods and services were limited, which meant that people had to spend more money to buy the same goods and services that they were able to buy before at an affordable price.

The German hyperinflation in the 1920s is one of the worst cases of hyperinflation in the world’s history. It led to a severe economic, social, and political crisis; it also weakened the Weimar Republic and paved the way for the rise of the Nazi Party.

Sigh...

Now that I remember, I also had to write about QE (Quantitative Easing). But my words have inflated the article enough that I don’t want to write it anymore.

Before ending my article, I would also like to mention that inflation is a symbiotic curse in the long run, but in the short term, along with QE, it can be used to stimulate the economy.

Coming up next will be a detailed article on QE. 

Till then, drop a like and share it with your peers.

You can access the other articles and the first part of this article by clicking here.