Inflation and the poverty trap

What causes inflation? Some people think it has to do with unions asking for more money which makes prices go higher. Other people think it is because businesses crave so much profit that it takes more money out of the working man’s pockets, which makes the prices higher and that gives us inflation. Other people say they just don’t know. That last group is the only correct one.

Let’s suppose that one year Noz has a total of 160 thousand Buks in circulation. And in Noz there are a total of 10,000 things in which we’ll call goods and services. So we have 160 thousand Buks divided by 10,000 things, or each “thing” averages 16 Buks.

Now let’s suppose in order to pay for another program, the Wiz decides that he’d better not push the people too far. They’ve been taxes enough and he’s edgy…he thinks maybe if they’re taxed much more there might be a revolution, as in 1776. So the Wiz goes to the constituency and says, “Folks, I’m not at all happy with the lines down the middle of the street. We’re still having some accidents and what Noz really needs and must have are wider lines down the street so everybody is safe and happy.”

Now he’s afraid to tax any more so he says, “Fine…don’t worry anybody…I’ll get the money.” Then he goes to the printing press and runs off, let’s say, 40 thousand Buks needed to pay for the project. Now what do we have? We have the land of Noz with wider stripes.

But let’s take a look at the economy. Now there are 200 thousand Buks, and remember, still 10,000 “things”; we now have: 200 thousand Buks divided by 10,000 things equals 20 Buks per “thing”. So what used to cost 16 Buks per thing now costs 20 Buks per thing because the government printed a bunch of extra Buks. And that, students, is inflation. That’s all it is.


If anyone else prints money, he goes to jail, but the government gets away with it because the people don’t understand. The government is the only winner since, as incomes go up because of inflation, the government taxes a bigger share of your income because you’re in a higher tax bracket even though your Buk buys you less.

The devaluation of the country’s currency causes prices to rise and then, the unions don’t have any choice but to demand higher wages…they have to just to be able to live the way they did before inflation, because things cost more. And businessmen then have no choice but to raise prices of their goods and services because things and salaries cost more. If they don’t, they’re out of business. Unions and businesses to not cause inflation, rather, they are victims of inflation. Think of someone adding water to milk with the intention of fooling people into thinking that there is more milk. Yes, there’s more to drink, but one has to drink more than before to get the same nourishment. This is another important fundamental of economics.

Does printing money always cause inflation? There is only one way that it doesn’t and that doesn’t happen often or for long. Let’s go back to Noz with the 200 thousand Buks and the 10,000 things. Suppose that The Wiz runs off ten percent more money, 20 thousand Buks for a project, so now there’s 220 thousand Buks in Noz. But let’s also suppose that in that same year the people of Noz get more industrious and produce an additional ten percent more goods and services, or “things”: 10,000 plus 10% equals 11,000 things. One the first hand, 200 thousand Buks is divided by 10,000 things equals 20 Buks per thing as the average price of things. Afterward they had 220 thousand Buks divided by 11,000 things equals 20 Buks per thing. No inflation because production went up as fast as the money increased.

However, in real life, while such an event occurs for short periods of time, our economy historically has ups and downs called cycles. When the cycle is up with production increasing, inflation is slight; when it’s on the downside, there’s more inflation since production doesn’t keep up with the additional money. Is printing money the only source of inflation? No, it also comes from credit, from the fractional reserve method of banking. When someone is given credit, all of a sudden money appears from nowhere. But that’s another subject, and it’s more difficult to understand. Another lesson for another day.

So what’s so bad about inflation? If prices and then wages go up, doesn’t that kind of offset things? This is one of the sorest points and one of the least understood of all the fundamentals of economics. Let’s go back to Noz and see what happens.

Let’s look at our latest situation in Noz and try to compare the effects of inflation in Noz to the effects of inflation in our country. In Noz, things that used to cost 4 Buks now cost 5 Buks. Remember, the Gross Domestic Product went from 160 thousand Buks up to 200 thousand Buks in money, but the actual goods and services stayed the same.

                200 – 160 = 40
               40 ÷ 160 = 1/4 = 25% inflation

Now what happens? The first thing that happens is that people like the Doctor say, “I used to charge 8 Buks for a house call, now I’ll just charge 10; because my costs are up.” Then the Movie Producer says, “We used to sell tickets for 4 Buks for one of my shows and now we are going to have to charge 5 because my costs are up.” So he has the signs changed to show the price increase from 4 to 5. Inflation really isn’t that much of a problem to people in the higher income levels.

And, of course, the Baker has to erase the chalkboard which says 80 cents for a loaf of bread and make it 1 Buk. The Tailor instead of charging 40 Buks for a jacket, now has to charge 50. But as we come down the line, let’s take a look at The Wiz…he’s making 25 thousand Buks a year and says, “It costs me more now to live than it did before so I am just going to vote myself a raise,” (which he has never hesitated to do in the past). You see he has that authority; the people of Noz gave it to him.

Let’s take a look at the people at the bottom of the economic ladder. Let’s look at our artist, now unemployed and receiving 15 thousand Buks a year from The Wiz. Prices started creeping up because of the new stripes and the new money The Wiz had printed, and the artist is finding it more and more difficult to get by on the 15 thousand Buks a year. His rent has gone up, food has gone up, services have gone up…first thing you know he can’t afford to go to any more movies because the Buks that used to go to an occasional movie now must go to higher food costs. And things get tough so the artist goes back to The Wiz and says, “I can’t make it on this. I’ve got to have more.” So, to make a long story short, he is finally given more. But, let’s say a year has passed in this process. What’s happened to his Standard of Living in that year? It’s gone down, since during the year his 15 thousand Buks couldn’t buy what they did last year. So inflation causes the people on government assistance to suffer through the process until or if there is a financial adjustment upward, and all that adjustment does is get them back to where they were before…that is, barely getting by…only to find out another round of inflation is going to make them poorer even though they have more Buks than they did before. And the process doesn’t stop as long as there is inflation.


Now let’s take a look at our janitor who makes 10 thousand Buks a year…we called that poverty level. His contribution to the land of Noz is not considered as significant as the others and he is paid accordingly, but what happens now when inflation hits him? What happens with that 25 percent increase because of the new stripes down the road, because the government “helped” someone?

Well, let’s see. Prices start to creep up on him. Now the janitor doesn’t buy new clothes; he never goes to a movie because he can’t afford it. When he buys bread from the baker, he buys left-over bread from the day before because the baker gives him a cut-rate price. When his back is hurting him, he doesn’t go to the doctor. He can’t afford it. It isn’t a matter like it was with the artist, who gave up going to movies. This man has nothing to give up. He is living on bare essentials as it is. Can he raise his wages? His superiors say, “All you do is sweep up, man. We can’t pay more than we are paying now…our prices are up 25 percent…either you keep your 10 thousand Buks a year or we’ll get one of those people from the land of Roz who would be grateful to have the job you are griping about.”

So the janitor says to himself, “I’m trapped…what am I going to do?” Then he sees the artist who was already making 5 thousand Buks more than him and not even working, and also got a big raise from The Wiz. What does the janitor do? He says, “This is dumb, I’m going to The Wiz,” which he does, and convinces Wiz that he should be unemployed too, because he simply cannot make it. He is facing inadequate shelter, insufficient food, no medical help…he could literally die. Wiz, feeling bad about this, goes back to the people of Noz and they say, “Sure, let’s help out this poor guy.”

So what do we have now? We have another producer turned non-producer, living on the workers’ Buks, lowering their Standard of Living. All of this not because he doesn’t want to work, but because he can make more money by not working…and all this because of inflation.


 Let’s take a look at history:


Inflation is not much bother to high income people; it is a definite bother to middle income people; it is a blood-sucker and poverty-perpetuator to poor people. And, only the government benefits because it gets more money to spend on more things. And history shows that whenever the government gets more money, it just spends more money.

Click here if you don’t want to wait to see how this plays out in America
Professor Frankum
How to Understand Economics in 1 Hour

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