Why Does The Cost Of Living Keep Rising - Part IV

Part IV

So why DOES the cost of living keep rising? Our carpenter and blacksmith want to trade with each other; the carpenter is prepared to build a nice bench for the blacksmith in return for two ounces of silver. But the blacksmith doesn’t currently have any silver (money) so he gives the carpenter his IOU, his promissory note that he will give the carpenter the silver when he has been paid by his customers.

The carpenter believes this IOU (or yen, or pound, or dollar etc.) can be used to directly purchase something without having to mess around exchanging cumbersome metal, because everybody in his village has confidence that the blacksmith is good for the silver.

However, the blacksmith not only doesn’t get his next job, but he also decides it’s too much like hard work slaving over a hot anvil all day, so he decides that he isn’t going to work at all anymore. He can just keep giving out his IOU notes (or pesos, or rubles, or rupees etc.).

So the blacksmith is handing out these IOU’s to people all over the village, and none of the villagers yet realize that they are actually worthless (because he isn’t going to honor them with his labor). The IOU is only as good as what is backing it, in this case NOTHING.

You’ve heard of supply and demand of course. This is where the price of something is determined, to a large degree, by how much somebody is WILLING to pay for it. If there’s a high supply and low demand, then the price will drop. If there’s a low supply and high demand, the price will rise.

In our village, here is what happens next: all the other people in the village that have the blacksmith’s IOU’s, for their products and services they’d provided him, decide that they want to use the IOU’s for things for themselves; they want to spend the IOU’s.

All the other merchants who supply the things that the people want, see an increase in demand for their products and realize that they will have to increase their supply of goods which means more work for them (and possibly paying others MORE to help them make the products). They therefore RAISE their prices accordingly.

So because the blacksmith put a lot of IOU’s into the village’s financial system, backed by nothing, and because he wanted products and services but didn’t want to give anything back in exchange, ALL of the IOU’s started to become worthless AND the prices of products from the merchants started to go up!

Then, upon finding out that there was nothing backing the blacksmith’s IOU’s, the people realize that the IOU’s were worth less, so would have to trade them for less (if anything at all).

As you can see from this, inflation is only created when money (promissory notes) is put into the financial system when it isn’t backed by anything. The MORE of these promissory notes that are released into the system, the worse the problem gets.

The only thing keeping many countries economies afloat is the population’s BELIEF, that they WILL get goods or services in return for the pieces of paper, these IOU’s.

Did you ever hear the story of the emperor’s new clothes, where he was convinced that he was wearing ‘new clothes’ when really he was butt-naked in public? It’s possible to convince millions, no BILLIONS, of people that something is true when it patently is NOT, but as Winston Churchill once said:

“The truth is incontrovertible; malice may attack it, ignorance may deride it, but in the end, there it is.”

Some people, including many noteworthy financial analysts around the world, have concluded that running a country in this manner is financial (and therefore national) suicide, though this isn’t necessarily true.  Need to find money for some new ‘venture’?  Simple, just PRINT some more notes………..even though they are not backed by anything other than ‘belief’.  Will it make the REST of the notes in public circulation (YOUR notes) less valuable?  Of course it will.  They call that INFLATION.

We are NOW using belief AS our currency, rather than metal (gold or silver), belief that the system works and will continue to do so. This may not be such a bad thing of course; it’s a matter of having belief in either Gold or belief in the people running the financial system of your country.

So…………do you believe????

Luke