Why Everything Gets More Expensive Over Time, Part Deux
On 14 December 2011 I published an entry talking about why everything gets more expensive over time ( what is labeled inflation by economic junkies ). I was asked by a commentator to that post when there would be a part two... so after many years here it is. Reading that earlier post again, I wrote it in a very complicated way. I hope to make it less complicated... I hope. The explanation of inflation can be routine for some people but to regular people who simply work for a living, it can be difficult to understand why a gallon of milk or a gallon of gas costs more today than it did some years ago while their wages / salary have not gone up in the same manner as the milk or gasoline.
I'd like to simplify the concept as best I can at this time.
Imagine a small town where only ten people reside. All ten people have something to offer one another. One is a butcher. This butcher raises cows and sells milk ( lots of cows and lots of land the cows graze on ) and other products from cows. Another person is a carpenter. This carpenter makes chairs and tables and other wood products as well as helps people build houses and sells them the wood ( lots of land with lots of trees ). Another person is a tailor. He makes clothes for everybody and has an eye for style. He has sheep and other materials to make clothes and other such products to decorate houses with. There are seven other people who offer valuable goods and services, each conditionally independent from one another and self-sustained in their work and their standing among the other townspeople. All ten own their land outright and when a need arises in town, they all decide what to do about such needs. All are equally important and needed. All trade their goods and services for the things they want and need from each other ( thus their conditional independence ). For example, the butcher trades three months of milk for a dining room set made by the carpenter. The tailor trades three suits for three months worth of milk from the butcher and three suits for new wood from the carpenter for new floors in his tiny home. All people in town know how to trade and how to get their fair share and a fair deal for what they have to offer. This is the manner they and their town has conducted business for as long as they can remember.
One day, someone moves into town and brings with them a radical new idea. This idea promises more wealth for all parties involved and the ability to trade their goods and services immediately without having to wait for other goods and services to be made available to complete a trade ( having to wait three months for the milk or the wood products, for example ). The idea promises a 'store of value,' for although a suit or a table can last for more than three months, milk cannot ( very short time value for the milk ).
The radical idea is money. The new person is a banker. The cost to have a store of value is an interest charge. The rest of the town is convinced into trying out this new idea. The townspeople believe the promise of more wealth and easier ways of conducting business sounds great to them. The townspeople have heard about other towns using money and they would also like to try this new idea of money.
The new banker issues money with the name of the town on it and everyone likes seeing their town's name on the new money. The banker says that the only way for this new idea to work, for them to store their value in the money, is for the townspeople to now only trade money for goods and services and to price the cost of their goods and services according to the amount of money they have. Instead of seeing three months worth of milk being traded for three suits, they are now to see three dollars ( $3.00 ) being traded for either three months worth of milk or for three suits. This seems reasonable to them, makes sense and is fair, since the cost of all items now trade accordingly to their original trading value, even now having real things being seen as a numbered value.
The banker issues a thousand dollars ( $1,000.00 ) to the town so its people can buy and sell what they want and need. It is a small town and the new prices of items range from one penny ( $0.01 ) to one dollar ( $1.00 ). Each of the ten townspeople receive on average $100.00 according to the value of their land, their businesses and are each charged 1% ( one cent / $0.01 ) for every dollar lent to them. The practical value of the money is found in the collective value of land, animals and possessions of the townspeople. These possessions of theirs is the collateral for the money, another term the people had to agree to in order to trade like other towns and use the money as a store of value ( an incentive for the butcher and his milk ). The townspeople understand that if they fail to pay the entire amount and added interest charge, some of their possessions may be lost an be used as payment for any outstanding debt. This makes sense and sounds fair to them since they would credit others and be in debt to others when simply trading / bartering their goods and services. They don't perceive anything different anything risky happening since they have all been solvent the entire time prior to the banker showing up and prior to the idea of money being introduced to them.
However, since the banker is charging interest for his service, the townspeople have no choice but to increase the cost of their goods and services. This is seen as simply another cost of 'doing business' for the rest of the town. The townspeople accept the increase in costs as part of being modern like the other towns using money and for the benefit of storing value in the newly issued money. All is well in the town and the townspeople feel good about having their own money despite the changes in the manner they view their goods and services, liability to the debt and the increased cost due to the interest charge.
The increase in prices is small but progressive, with some believing it to be seemingly insignificant while others see it as quite burdensome since it has limited their ability to by a certain quantity of things. Some items have doubled in price from one penny to two ( $0.01 to $0.02 ) and some things have increased in price almost half from twenty cents to thirty cents ( $0.20 to $0.30 ).
What is interesting to note is that the 'value' of such things did not increase on their own or due to a change in supply and demand, but only due to the cost of having to compensate for a debt with an interest demand.
Another change to notice is this: for years, everyone in town would eventually have a new wooden fence for their property made by the carpenter every ten years or so. They would also have the roof to their homes and barns either restored or constructed with new wood products from this same carpenter to keep things in good and working order, again every ten years or so. But since the cost of his handiwork and wood products have increased, some townspeople are waiting a few more years before putting up a new roof and new fence. This diminishes property value. The carpenter has a choice to lower his prices and stay productive, but doing so would mean he would work harder than the rest of the people in town while realizing the same results. If he keeps his cost up according to the cost of everything else, he won't have the regular work I and income ) he used to.
At the end of the first year, each person in town owes the banker an extra dollar ( $1.00 ) plus the original one hundred dollars ( $100.00 ) that was lent to them. Considering all things and the ease of buying and selling afforded by the use of money, it doesn't seem like much and the townspeople are excited to be trading money and not having to wait for trades to be completed ( wait three months for the milk or the wood products, for example ). Some of the townspeople have been doing really well and have been saving their money, not buying much stuff and instead are paying off the banker sooner than others. Some of these early payers receive better terms the next year they borrow money, some getting a half of one percent rate ( 0.50% ). That means instead of owing the banker a dollar ( $1.00 ) next year, they will only owe the banker fifty cents ( $0.50 ) next year on top of the $100.00 borrowed. These early payers see great opportunities under the new system and are already planning on growing their business in some interesting ways. There may be some land coming up for sale soon and this is great news for those who are ready with a good amount of savings.
A few others have not been so fortunate ( or disciplined ) and have asked for more time in paying back the debt. One of these unfortunate souls was the carpenter. He had no choice but to give up some tools to the banker in the hope of buying more time to pay off the entire loan plus the interest. He is still in business, but now is limited in what he can with less tools and is thinking of selling some parcels of land to make a cushion of savings for himself. He thinks the money from the property sale will help buy back the tools he lost to the banker and will put him ahead in paying back this and next year's debt. But, less land means less trees and less wood for projects and wood products. He's determined to figure out what went wrong and not to repeat the same mistake again.
Very few of the townspeople clearly realize what happens when the cost of products and services rise against a limited and fixed amount of money: what economists call inflation. Some others came up short and no matter how much they worked and how good they were in their business dealings. They simply didn't have enough money at the end of the year to pay back the full amount of the loan and the interest demanded. The banker, being kind and understanding about how things like this can happen, grants them an extension, but at a cost of more interest, now at two percent ( 2.00% ). The banker had to ask / demand these short-comers to hand over some of their possessions to clear their outstanding debt and to confidently lend them next year's money. It seems reasonable to the borrowers, for they are a bit embarrassed about their failure to pay back on time as compared to how others in town have paid back on time or early, so they consent and accept the new terms with determination to not let this happen again.
Life, buying and selling, continues on.
In due time, some who never made the proper adjustments and which were already behind in payments, continued to experience increased interest rates and more of their possessions given over to pay for the outstanding debt. They would eventually and systematically lose all or most of their animals, all or most of their possessions and in some cases all or most their land. These possessions of theirs would either be absorbed by the banker or auctioned to the other townspeople.
For those few who caught on to the new way of trade ( buying and selling with money ), they either stayed afloat or prospered along with the banker. Those others who didn't figure out exactly why the new system wasn't working for them eventually lost some or all of their prior possessions... and some eventually became renters and began to work for others instead of working for themselves. The banker, in due time, had first place opportunity to gain possessions and land prior to anyone else in the town. The banker, over time, eventually came to own some of the best land and possessions / business in town. The prosperity realized by a few in town was reason enough for them to never consider reverting back to the 'old' method of trading / bartering. To give up the money and go back to trading / bartering seems like going backwards now that they can do more, have more and make more using money.
Trading something with no intrinsic value for things of real value comes at a cost unseen and unknown to most.
Consider $1,000.00 were lent to ten people, each person having roughly $100.00 and being charged 1% for the use of the money. At the end of any given year, using the one percent being demanded from all ten people, the people would have collectively paid back $10.00 plus the original loan amount of $1,000.00 ( a total of $1,010.00 ).
The question is: where did the additional $10.00 come from?
The banker only issued $1,000.00 and not $1,010.00??
The interest was the culprit in bankrupting some while enriching others and enriching the banker who became master of them all.
So what can be derived from this story and these numbers?
One thing is: the concept of charging interest is mathematically unsound, for it absorbs more money than exists in circulation, thus producing a siphoning effect and leaving some in the negative.
Another thing is: the siphoning effect eventually absorbs real things, like land, goods and people's services ( namely people's labor ).
Another thing: the siphoning effect causes costs to rise, regardless of their actual value or the natural pricing affect of supply and demand.
Yet another thing: those few who stay ahead of the siphoning effect begin to leverage their wealth onto others.
One last thing: the majority who stay even or behind the siphoning effect are in jeopardy of losing their possessions or worse; never escaping their economic position.
I'd like to simplify the concept as best I can at this time.
Imagine a small town where only ten people reside. All ten people have something to offer one another. One is a butcher. This butcher raises cows and sells milk ( lots of cows and lots of land the cows graze on ) and other products from cows. Another person is a carpenter. This carpenter makes chairs and tables and other wood products as well as helps people build houses and sells them the wood ( lots of land with lots of trees ). Another person is a tailor. He makes clothes for everybody and has an eye for style. He has sheep and other materials to make clothes and other such products to decorate houses with. There are seven other people who offer valuable goods and services, each conditionally independent from one another and self-sustained in their work and their standing among the other townspeople. All ten own their land outright and when a need arises in town, they all decide what to do about such needs. All are equally important and needed. All trade their goods and services for the things they want and need from each other ( thus their conditional independence ). For example, the butcher trades three months of milk for a dining room set made by the carpenter. The tailor trades three suits for three months worth of milk from the butcher and three suits for new wood from the carpenter for new floors in his tiny home. All people in town know how to trade and how to get their fair share and a fair deal for what they have to offer. This is the manner they and their town has conducted business for as long as they can remember.
One day, someone moves into town and brings with them a radical new idea. This idea promises more wealth for all parties involved and the ability to trade their goods and services immediately without having to wait for other goods and services to be made available to complete a trade ( having to wait three months for the milk or the wood products, for example ). The idea promises a 'store of value,' for although a suit or a table can last for more than three months, milk cannot ( very short time value for the milk ).
The radical idea is money. The new person is a banker. The cost to have a store of value is an interest charge. The rest of the town is convinced into trying out this new idea. The townspeople believe the promise of more wealth and easier ways of conducting business sounds great to them. The townspeople have heard about other towns using money and they would also like to try this new idea of money.
The new banker issues money with the name of the town on it and everyone likes seeing their town's name on the new money. The banker says that the only way for this new idea to work, for them to store their value in the money, is for the townspeople to now only trade money for goods and services and to price the cost of their goods and services according to the amount of money they have. Instead of seeing three months worth of milk being traded for three suits, they are now to see three dollars ( $3.00 ) being traded for either three months worth of milk or for three suits. This seems reasonable to them, makes sense and is fair, since the cost of all items now trade accordingly to their original trading value, even now having real things being seen as a numbered value.
The banker issues a thousand dollars ( $1,000.00 ) to the town so its people can buy and sell what they want and need. It is a small town and the new prices of items range from one penny ( $0.01 ) to one dollar ( $1.00 ). Each of the ten townspeople receive on average $100.00 according to the value of their land, their businesses and are each charged 1% ( one cent / $0.01 ) for every dollar lent to them. The practical value of the money is found in the collective value of land, animals and possessions of the townspeople. These possessions of theirs is the collateral for the money, another term the people had to agree to in order to trade like other towns and use the money as a store of value ( an incentive for the butcher and his milk ). The townspeople understand that if they fail to pay the entire amount and added interest charge, some of their possessions may be lost an be used as payment for any outstanding debt. This makes sense and sounds fair to them since they would credit others and be in debt to others when simply trading / bartering their goods and services. They don't perceive anything different anything risky happening since they have all been solvent the entire time prior to the banker showing up and prior to the idea of money being introduced to them.
However, since the banker is charging interest for his service, the townspeople have no choice but to increase the cost of their goods and services. This is seen as simply another cost of 'doing business' for the rest of the town. The townspeople accept the increase in costs as part of being modern like the other towns using money and for the benefit of storing value in the newly issued money. All is well in the town and the townspeople feel good about having their own money despite the changes in the manner they view their goods and services, liability to the debt and the increased cost due to the interest charge.
The increase in prices is small but progressive, with some believing it to be seemingly insignificant while others see it as quite burdensome since it has limited their ability to by a certain quantity of things. Some items have doubled in price from one penny to two ( $0.01 to $0.02 ) and some things have increased in price almost half from twenty cents to thirty cents ( $0.20 to $0.30 ).
What is interesting to note is that the 'value' of such things did not increase on their own or due to a change in supply and demand, but only due to the cost of having to compensate for a debt with an interest demand.
Another change to notice is this: for years, everyone in town would eventually have a new wooden fence for their property made by the carpenter every ten years or so. They would also have the roof to their homes and barns either restored or constructed with new wood products from this same carpenter to keep things in good and working order, again every ten years or so. But since the cost of his handiwork and wood products have increased, some townspeople are waiting a few more years before putting up a new roof and new fence. This diminishes property value. The carpenter has a choice to lower his prices and stay productive, but doing so would mean he would work harder than the rest of the people in town while realizing the same results. If he keeps his cost up according to the cost of everything else, he won't have the regular work I and income ) he used to.
At the end of the first year, each person in town owes the banker an extra dollar ( $1.00 ) plus the original one hundred dollars ( $100.00 ) that was lent to them. Considering all things and the ease of buying and selling afforded by the use of money, it doesn't seem like much and the townspeople are excited to be trading money and not having to wait for trades to be completed ( wait three months for the milk or the wood products, for example ). Some of the townspeople have been doing really well and have been saving their money, not buying much stuff and instead are paying off the banker sooner than others. Some of these early payers receive better terms the next year they borrow money, some getting a half of one percent rate ( 0.50% ). That means instead of owing the banker a dollar ( $1.00 ) next year, they will only owe the banker fifty cents ( $0.50 ) next year on top of the $100.00 borrowed. These early payers see great opportunities under the new system and are already planning on growing their business in some interesting ways. There may be some land coming up for sale soon and this is great news for those who are ready with a good amount of savings.
A few others have not been so fortunate ( or disciplined ) and have asked for more time in paying back the debt. One of these unfortunate souls was the carpenter. He had no choice but to give up some tools to the banker in the hope of buying more time to pay off the entire loan plus the interest. He is still in business, but now is limited in what he can with less tools and is thinking of selling some parcels of land to make a cushion of savings for himself. He thinks the money from the property sale will help buy back the tools he lost to the banker and will put him ahead in paying back this and next year's debt. But, less land means less trees and less wood for projects and wood products. He's determined to figure out what went wrong and not to repeat the same mistake again.
Very few of the townspeople clearly realize what happens when the cost of products and services rise against a limited and fixed amount of money: what economists call inflation. Some others came up short and no matter how much they worked and how good they were in their business dealings. They simply didn't have enough money at the end of the year to pay back the full amount of the loan and the interest demanded. The banker, being kind and understanding about how things like this can happen, grants them an extension, but at a cost of more interest, now at two percent ( 2.00% ). The banker had to ask / demand these short-comers to hand over some of their possessions to clear their outstanding debt and to confidently lend them next year's money. It seems reasonable to the borrowers, for they are a bit embarrassed about their failure to pay back on time as compared to how others in town have paid back on time or early, so they consent and accept the new terms with determination to not let this happen again.
Life, buying and selling, continues on.
In due time, some who never made the proper adjustments and which were already behind in payments, continued to experience increased interest rates and more of their possessions given over to pay for the outstanding debt. They would eventually and systematically lose all or most of their animals, all or most of their possessions and in some cases all or most their land. These possessions of theirs would either be absorbed by the banker or auctioned to the other townspeople.
For those few who caught on to the new way of trade ( buying and selling with money ), they either stayed afloat or prospered along with the banker. Those others who didn't figure out exactly why the new system wasn't working for them eventually lost some or all of their prior possessions... and some eventually became renters and began to work for others instead of working for themselves. The banker, in due time, had first place opportunity to gain possessions and land prior to anyone else in the town. The banker, over time, eventually came to own some of the best land and possessions / business in town. The prosperity realized by a few in town was reason enough for them to never consider reverting back to the 'old' method of trading / bartering. To give up the money and go back to trading / bartering seems like going backwards now that they can do more, have more and make more using money.
Trading something with no intrinsic value for things of real value comes at a cost unseen and unknown to most.
Consider $1,000.00 were lent to ten people, each person having roughly $100.00 and being charged 1% for the use of the money. At the end of any given year, using the one percent being demanded from all ten people, the people would have collectively paid back $10.00 plus the original loan amount of $1,000.00 ( a total of $1,010.00 ).
The question is: where did the additional $10.00 come from?
The banker only issued $1,000.00 and not $1,010.00??
The interest was the culprit in bankrupting some while enriching others and enriching the banker who became master of them all.
So what can be derived from this story and these numbers?
One thing is: the concept of charging interest is mathematically unsound, for it absorbs more money than exists in circulation, thus producing a siphoning effect and leaving some in the negative.
Another thing is: the siphoning effect eventually absorbs real things, like land, goods and people's services ( namely people's labor ).
Another thing: the siphoning effect causes costs to rise, regardless of their actual value or the natural pricing affect of supply and demand.
Yet another thing: those few who stay ahead of the siphoning effect begin to leverage their wealth onto others.
One last thing: the majority who stay even or behind the siphoning effect are in jeopardy of losing their possessions or worse; never escaping their economic position.
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