Thursday, December 14, 2006

Econ 103 a.k.a The Inflation Monopoly Game

I touched upon inflation and it really needs more explanation as people dont really understand it or what it does. defines inflation as "a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency." And since I cannot improve upon that this lesson is concluded! (haha, you wish!)

So it is a rise in the general level or prices because there is more dollars in circulation, which causes each dollar to be worth less. Essentially you have an actual wealth pool of, say 100 million dollars. Now if there are 100M worth of bills floating around then the price of everything will stay the same (subject to the decreases indicated in Econ 102.) But if you add $1,000 to that 100M then what you get is a dollar that is worth just a little bit less and as a result will buy just a little less than it did before.

Inflation is a process of continually adding that $1,000 to the money supply. Each little bit isn't really noticed but together they add up to steal away the money that you have and that which you have saved. But it isn't just a piddly $1,000 being added here and there. It is usually several BILLION added. Every week. Last week it was $9.7 billion. In one week. ONE FREAKING WEEK!

If you need a mental picture or some sort of hands on activity try this. Pull out the monopoly board game. Actually, pull out two as you will need it. Have everyone start out with the regular amount of money and begin play. But everytime it is your turn, add $100 to your bank (this would grow over the course of the game). Not everyones, just yours, and watch what happens. First off you are going to have complaints, but secondly you are going to notice that as the first person to have that money you are going to benefit from it to the detriment of the other players. This is because you will be better able to buy property or pay fees. But as you start paying those fees or buying properties you are going to find that more and more money are demanded for those fee or for those properties. $400 for boardwalk? Please. Try $10,000. Why? Because you have devalued each and every dollar by adding more to what is in circulation. But what you aren't going to do is change the real cost of each property. This is because their "real cost" hasn't changed, what has changed is the value of the medium you are using for exchange so you see increased prices.

One other thing that should be easy to see in that game of Inflation Monopoly is that the other players have a hard time making ends meet. This is because they are behind the curve of the inflation. This is inevitable. Inflation must end for them to catch up but if you stop inflating then you lose your advantage over the others. An easy choice for the readers of this blog, and I would say an easy choice for power hungry politicians, bankers and behind-the-scenes power brokers. It just wouldn't be the same choice.