4. What is Inflation?
Price is the point of contention between buy-low and sell-high. The settled price allegedly represents a negotiated compromise, but usually both parties are experiencing multiple pressures and would prefer something different. The past serves as the baseline for how we understand a price. Prices move due to fluctuating market conditions. Inflation is generally regarded as the sellers winning, and deflation is regarded as the buyers winning.
Inflation creates difficulties for budgets because the increased cost of any good requires either purchasing less of that good or less of some other good. It acts the same as a revenue cut and lowers the Standard of Living. As a result, inflation gets scorned because it limits our appetite, and takes away our choices. For the same reason, deflation is welcomed when buying. It acts like a revenue increase, and allows for the buying of more goods. Our view of inflation and deflation is dependent on if we are buying and selling. It is its own dissonance. We are all buyers and sellers.
Price Dissonance by Steve Consilvio
Supply and Demand Theory
The most common explanations for inflation and deflation are one of four variants of Supply and Demand Theory: there are either too many or too few Buyers, Sellers, Products or Dollars (BSPD). All versions assume that the seller wants to sell-high and the buyer wants to buy-low. Nobody wants to pay-more, even if they are willing to charge-more. Deflation gets explained in the same way as inflation. It is a change in who wins or loses, but the underlying forces are the same.
Supply and Demand Theory claims that as the volume of BSPD fluctuate, the negotiated prices fluctuate in response. The macro-level condition determines the micro-level transaction.
Supply and Demand Theory by Steve Consilvio
A Buyer, a Seller, a Product and Money are necessary components of every transaction. Economic schools of thought have formed based on each part. These schools disagree on the specific cause, but agree regarding the process. For example, Supply-Siders suggest that the economy will run best by having more producers. According to their view, competition will increase choice and lower prices. They are pro-business, free-market advocates. Government regulations are unfair and unwise because they create advantages and disadvantages that the marketplace would not naturally provide. They accept that one business may come to dominate an industry because of skill and effort. That is okay, because the economy functions based on the survival of the fittest. A new business will eventually rise and challenge the leader. The analysis centers primarily on government regulations, which are interpreted as interference. This view is held primarily by those engaged in selling.
When it comes to the supply of money, there are two opposing versions. Libertarians focus on the amount of money available in the economy. They complain that the Federal Reserve and deficit spending have created a glut of money in the marketplace. Excess money allows prices to rise. They see the economy as a zero-sum game. Sellers charge according to what the buyers can afford. More money in the system means that buyer will pay more. The existence of inflation is considered proof of their claim. Curiously, more money does not allow people to buy more products, it only allows them to pay more for the same product.
In contrast, Keynesian economic arguments favor deficit spending by the government. They accept that competition will lower prices and increase efficiency, but the way to help sellers and create jobs is to infuse money into the economy and increase the number of buyers. When the economy is tight, it is because not enough buying is occurring, which makes the poor poorer, and businesses struggle. The rich do not need extra help. They are just another buyer who is not buying during lean times. In general, the Keynesian is more holistic, and takes into account the needs of the buyers and sellers.
Priming-the-pump allows people to buy more, not pay more. More buying will keep the producers busy, who will then hire more workers. This further increases consumption, production and a rising Standard of Living. Democrats propose getting more money into the hands of the poor and middle-class, because they will immediately spend it. For them, government spending is a positive thing.