Money

Inflation

In Argentina, the cost of food is about 50% higher than it was this time last year…

In Zimbabwe and Sudan, the prices of everyday goods are doubling (or more) every year…

And in Venezuela, according to Johns Hopkins professor Steve Hanke, the annual inflation rate is nearly 65,000%.

Rapid inflation – or hyperinflation, in Venezuela’s case – is a telltale sign of a currency crisis. And government incompetence is the root cause.

Modern currencies are “fiat” – they aren’t backed by anything. The value of a fiat currency is dependent upon the government, which effectively controls the amount of money in circulation – either physical or electronic.

If policymakers spend recklessly, take on too much debt, or otherwise compromise the faith in the currency, then its perceived value declines. The result is higher prices for goods and services. In extreme situations, like Venezuela, the currency swiftly becomes worthless.

Whether it occurs quickly or slowly, inflation is unavoidable. Even the U.S. dollar has lost 93% of its purchasing power over the past century. Let’s say someone purchased $10 worth of food and clothing in 1918. Those same items would cost you about $170 today.

The point is, currencies – even the U.S. dollar, the reserve currency of the world – don’t hold their value well over the long term. Therefore, putting cash under your mattress and leaving it there for a long time isn’t a good idea.”

Money is just information. But it’s important information. It tells us how much of a claim we have on other peoples’ stuff – their time, their resources, and their output

— Bill Bonner

“Products are bought with products,” not with money alone, said the great 19th-century French economist, Jean-Baptiste Say.

He was describing the real world… the win-win world. If you want something, you’ve got to give something in return. Which means you have to produce something to give – and not just a piece of paper with green ink on it.

This basic insight is at the heart of civilization (trading, sharing, cooperating… rather than stealing). And it is at the heart of progress and prosperity, too (the more you want, the more new and better products you have to come up with).