Inflation and Magic Beans...

This post comes courtesy of my oldest daughter. We were walking from the car to our house after grocery shopping. We found a sale on my personal weakness - Jelly Belly brand jelly beans - and stocked up. I mentioned to my daughter that I was going to take my bag of magic beans and hide in the garage. She replied "But Jack only got a pocket full of magic beans to grow the beanstalk. Why do you get a bag?" My immediate response was "Inflation." She readily accepted that answer. Why did my ten year old child accept that so easily? We mention inflation as an excuse and just nod and move on. What is inflation? Why is it such an easy answer?

Inflation is thrown around a lot. What exactly is it? More often than not, inflation is used to refer to a rise in prices in general. Not all prices may rise, some prices may even go down, but it refers to the overall trend or average.  As a general rule, things go up a little bit each year - just a slight percentage - we call this "cost of living increases." However, sometimes prices will jump by 30% or more in just a short time. (I'm looking at you OPEC. ) This is hyperinflation and comes along with such fun items as a massive unemployment rate, a substantial interruption in production of goods or in the supply chain, or my personal favorite: economic collapse.  (Note sarcasm).

Inflation happens if money grows too quickly. To stop inflation, we just have to stop, or slow down, the growth of money. Simple, right? Well, enter politics. Sometimes governments want some inflation, so the fact that we know how to stop it won't prevent it from happening. Why? Excellent question. I am so glad you asked.

Now, we know the government prints money. So, when we have a deficit (or not enough money to pay our bills) why doesn't the government just print more? It seems like a simple solution. Trust me, it just seems that way. There are a whole lot of principles which come into play here. Since I am lazy blonde, I will keep it short for this post. Remember when we talked about supply and demand? If we have a lot of money floating around, then it isn't very valuable and it will take more money to buy something. If we don't have a lot of money, then it is valuable and less money will buy more things.  Think about "Jack and the Beanstalk." When the story was written, a cow was an even trade for a pocket of magic beans. Now, since magic beans (except the Dr. Pepper flavor, it seems) are all over the place, the cow is an even trade for a bag of magic beans. The supply of magic beans is greater, therefore the demand for them is lower. This means it takes more magic beans to buy a cow.

We can also stimulate the economy for growth by using inflation. I'll tackle that in another post. I have a bag of magic beans calling my name.