There are some other inflation factors that are often overlooked. The modern monetary system we have today is debt based. So any money that gets created is automatically treated as debt that goes on a balance sheet. This requires every debtor to produce goods and services and exchange them for money needed to pay the debt and interest. The Federal Government has to pay back their debt by order of the bond market, even if the debt is owned by the central bank. They just make the taxpayer produce the goods for them. Everything that is for sale has a value of its own that is not expressed in money, and because of that, money also has a value of its own that is contra to everything else. This is called the “real value” and its controlled by supply and demand. Inflation happens when the real value of all goods and services rises on it’s own and therefore lowers the value of money. This makes credit and money creation more economical because you can pay the debt later with cheaper money. If we have advancements in technology that lead to increased productivity, that can lower the value of all goods, which increases the value of money. This is what makes debt become more expensive to service. So the Federal Reserve prints money and buys bonds to lower interest rates, making the debt become less expensive to service. This just makes things worse down the road. The banks end up giving larger loans, and therefore increasing the debt-to-income ratio. The nominal interest rates are lower, but the size of the debt relative to income is larger, making the overall debt servicing costs higher. Now what really makes things chaotic is when you add aging demographics. The closer the median age is to retirement, the greater the need to pay off debt, save and invest money. This causes speculative mania in the investment world. You get too much investor demand for money, and not enough consumer demand for the goods tied to the investments. This causes the investments to form bubbles, leading to the “wealth effect”. The prices of the assets rise at an unsustainable rate, and the revenue generated by the assets do not. The only way to keep the asset bubble going is to keep expanding the debt bubble. Then there comes a time and point when the debt comes due, and the assets are not generating the revenue to pay it. So the debtor has to sell the asset. If all the debtors have to sell the assets around the same time, it drives the asset price down. This is when the value of the debt exceeds the value of the assets, causing the debtor to pay the debt back with more expensive money. The point I am trying to make, is the supply and demand fundamentals here were working in reverse. The asset price wasn’t going up because the investor valued the asset, it was because they valued the money they thought it would make for them. This indirectly causes the value of money to go up, and that’s why asset bubbles never last! Eventually this leaves so much bad debt on the banks books they have to stop lending. Then borrowers loose confidence in the economy and refuse to borrow. That why the Feds QE programs haven’t been effective. In order for everyone to get access to all the money the Fed has created, the value of all goods needs to rise over the value of all debts. Until then the newly created money will go nowhere. This leaves no other option but to write down the debt. This will retire many dollars from the system and will bring deflation and a depression. As you can see, the causes of inflation or deflation are not as simple as it seems.

Learning about our banking system can be astounding; it’s extremely relevant to anyone who uses money; and most people who use money are entirely unaware of what it is, how it works, and who/what affects it.

Jeff

p.s. Mises.org made a documentary –> http://www.youtube.com/watch?v=iYZM58dulPE