While inflation goes up and down... why is it that...?

Question

in a chronic long term sense... Currency slowly loses its value over the decades and the number of cents/dollars needed to make a purchase gradually rises indefinately? For example:

50 dollars was in 1920 roughly what 500 is today, and there were many booms and troughs between then and now

Answer 1

Nate seems to forget the value of money is interconnected with INTEREST RATES.

Right now, America is dealing w/mild inflation due to the interest rates being very low at this time.

Interest rates are the "value of money" because that is the measure of the amount of return that they yield in the currency exchange.

The Euro is worth approx $1.59- $1.61 in America dollars when before 2001 it was approximately .89 cents. There's been a large disparity because of again, the interest rates.

Inflation goes up and down based on economic policies, interest rate settings, and how much money the government prints up per year compared to how much money the government pulls out of the economy per year that needs to be "retired" because its old,deformed, and what not.

Your 1920 assumption is very correct. Inflation actually goes up an average of about 3% per year so multiply that by 88 years and you'll get today's prices/values.

The "Consumer Price Index" will adjust for inflationary values.

Hope this helps!

Answer 2

the reason there is so much inflation is because so much money is being created, prices rise.  if prices stayed the same, and more money kept being made, stores would go out of business, people would lose their jobs, and the stock market could crash.  the reason for the troughs are points in our history where we are facing economic hardship, or wages are dropped.  it all just depends on the public.

Answer 3

Inflation is the sole reason purchasing power erodes over time in our currency. The reason inflation can never be halted is because of our fiat currency structure where "Money" is created from Debt.

On Day 1 when the Federal Reserve puts money into the economy, it does so by creation the money from thin air, loaning that money out, and charging interest on it.

So assume you have an economy with $0.00 in it. You create $1.00 from thin air. By Fed Decree you push print on the machine and $1.00 is created. You then loan that money out to a member bank (ie: Bank of America) at a rate of 5%. That means BoA has to repay that loan with $1.05. But how can BoA get $0.05/cents if all the money in the world only amounts to $1.00? Answer? The Fed has to create $0.05/cents. Pooof, 5% Inflation has just been built into the monetary policy of our economy.

That is why year after year the money supply of the United States MUST increase. Other factors do force it to increase (ie: population or economic growth to prevent deflation). But inflation is inherent to having a Fiat Currency vs. a Hard Currency like Gold/Silver.

Answer 4

My friend time is also wealth. Its value is expressed in units of inflation. It is always good to have a reasonable value for timei.e. inflation should be reasonable otherwise time loses value.

Answer 5

ehm...the increase of values such as the one you described are different than inflation.

Money have internal and external values, so you need to differentiate between the two.

Besides, even with all the booms and troughs that the US is having, money will never lose it's price. So if it's too high, people will stop buying and the price will go down, and vice versa.