Another Perspective of Inflation

When understanding the consumer price index, even the economists measurements of it are inconsistent with the reality in which the exchange of goods and services at the price level are to be considered. An anecdotal perspective will properly illuminate it:

If you have a contractor who is refinishing a kitchen for a family, they must purchase goods from a local purveyor of contractor supplies. The nails, glue, wood, and counter-top materials for that kitchen are procured from a vendor. Additionally, this contractor must secure labor from the open market to complete the job in a timely and professional manner and must pay current fair wages to get the desired talent for the job. In order to do this many contractors must have capital to purchase theses goods and services to get the job done. This finance comes often in the form of higher interest, short term credit.

If you amortized this credit across an entire economy you have many people with extra cash on credit to secure goods and services with their industry. The baker buys their flour. The plumber purchases pipes and the truck driver must bring all that flour and pipes to the stores. Purchasing this on short term credit across an economy elevates the price of all those goods and services since there is more competition for the same resources with more available capital. When more competition occurs for that resource the price goes up.

If you take the contractor who is finishing up and the family that is going to write the check for that new kitchen, they went to their local bank and secure a loan to redo their kitchen giving them cash to pay the contractor. They will make payments with interest to finance the upgrades to their property to which they believe they’ll secure a return on investment.

This is where things like the Consumer Price Index become the symptom of the disease. In both instances where credit was extended, what was really happening is that a bank, using a principle of  Fractional Reserve Banking, protracted that money to the contractor and the home owner gaining double interest on the same kitchen securing payment in interest from both parties for an artesian kitchen. What must the home owner and contractor now do to recover the fees associated with that acquisition of capital?

Consider and alternative possibility:

If fractional reserve lending failed to give banks the flexibility of printing money out of thin air, money supplies would accurately reflect real value in the economy and instead of a dollar being worth 3% of what it was 100 years ago in terms of raw buying power its value and credit would hold more. While this might sound like a rant against credit consider what it would do to the banks ability to charge interest and back those funds up with real investments. The family who wanted the kitchen would save up their money and the bank using savings funds could invest a portion of those funds into the local economy with real money instead of fractional reserve money. The contractor could have short term credit needed to complete jobs and grow an economy with out the affects of inflation by a gross increase in the money supply. If you take this perspective to those who have investments currently, this system erodes the value of those investments consistently.

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