Monetary inflation

The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.

John Kenneth Galbraith
From his book - Money: Whence it came, where it went

 

Defining monetary inflation

Economists use the word "inflation" interchangably to mean both "price inflation" and "monetary inflation". These are in fact very different concepts, and not understanding the difference causes a great deal of confusion. It is for this very reason most people shy away from the topic - since they feel that only economists are "clevel enough" to understand economics.

Wikipedia defines price inflation as:

A rise in the general level of prices of goods and services in an economy over a period of time.

Wikipedia defines monetary inflation as given below.

Wiki-monetary inflation

 

 So the relationship between monetary inflation and price inflation is:

With time - monetary inflation results in higher price levels (i.e. price inflation). With monetary inflation the purchasing power of each monetary unit is eroded - buying fewer assets, and fewer goods and services.

The point to note is that price inflation in Australia is not the result of nurses or laborers who demand a wage increase (to match their cost of living increase) - but it is the direct result of an increase in the money supply, which can fluctuate between 10% and 20% each and every year.

 

The decrease in purchasing power incurred by holders of money due to inflation, imparts gains to the issuers of money.

St. Louis Federal Reserve Bank
(Review, Nov. 1975, p.22)

 

 

Changes in the quantity of money

broad-money-figuresPublished RBA figures indicate that the total quantity of money in Australia (or more specifically "broad money") increased by $1.4 trillion over a period of 36 years - from $50 million in Aug 1976 to $1.44 trillion in April 2012.

This massive increase in the supply of money is the very essense of "monetary inflation". At this point an obvious question should be:

So who created this $1.4 trillion in a mere 36 years?

Read further and all will be revealed. 

 

 

Money is primarily created through the extension of bank credit. The commercial banks can create money themselves.

Bundesbank
i.e. the German Central Bank

2009