economics 101: inflation

I recently finished "Whatever Happened to Penny Candy" by Richard J. Maybury. It's the second book in his Uncle Eric series. This installment is all about inflation. Of course, for the last decade, that's all anyone has been hearing about. Deficit and inflation, yada yada. I never really understood what it meant. After listening to a good portion of lectures by Murray Rothschild on economics, I finally understood what inflation really was. However, the history of inflation was not explained in the lectures I listened to. In "Penny Candy," everything makes sense.

These books are so cleverly written! They are never boring at any point, and always understandable. I suggest you read them, but I'm going to point out some interesting things I learned...

First, for anyone who isn't sure, inflation is the rise in the amount of money that is in circulation. The amount of money in circulation can rise by cause of two different things: counterfeiters, and most frequently, the government. As Maybury points out, inflation and rising prices are NOT the same thing. Rising prices are a result of inflation. Prices don't rise by themselves, however: when the dollar has been inflated, its value falls. And when the value of the dollar falls, it takes more dollars to pay for something.

I think I mentioned this in another blog post, but did you know that the dollar was exchangeable for one ounce of silver before 1965? Now our money is fiat money. Fiat money is money which is not backed with gold or silver, it is simply paper which is only made valuable by the legal tender law. The legal tender law states that money printed by the government is "legal tender for all debts, public or private." That's why people in Germany during runaway inflations would use their paper money to start fires - that's how worthless it was.

There is some very interesting history in this book about the Romans and their methods of inflation prevention. There is also a great analogy for imagining our government debt. Sometime in 2003, the federal debt was $6.783 trillion. How much is that? Maybury says that only astronomers can understand how much that truly is. So he puts it into an analogy:

"Visualize $1 million in $100 bills laid end-to-end. You would need 20 minutes to walk the length of this line of cash; it's about one mile. Walk a line of $100 bills in the length of federal debt and it would take you 228 years. This line of $100 bills would circle the earth 240 times." Wow. Imagine how long it would take now? Our federal debt is somewhere around $14.329 trillion. That's more than double it was seven years ago.

Anyway, for a full explanation of everything politicians are rattling on about concerning economics, read these books. I've just started "Whatever Happened to Justice," and it's so good. Maybury proposes that all economic failure is a direct result of a bad legal system. And of course, anyone who's ever seen a courtroom drama knows that the legal system is ridiculous. Truly ridiculous. Indeed, whatever did happen to justice? I'm gonna find out.

Until next time,
- caroline