Can you explain the mechanism of money inflation?
The mechanism of supply and demand is imperfect.  Producers don't know exactly how many purchasers/consumers for a good there are.  Some goods, by their nature, are in short supply, and some are plentiful. The process of price discovery is one where (in a nominally free market) producers and purchasers make offers and counter-offers to assess what the price should be.  As they do this the historical price changes, usually floating around some long-term average.  As it goes up, we experience inflation.  As it goes down, deflation. However, there isn't a fixed supply of producers and purchasers, so as new ones arrive and old ones leave, this too has an impact on supply and prices. Money (either in electronic or physical form) needs to be available to reflect the transactions and underpin the economy. Most central banks (at least in more established economies) aim for inflation of 2-4% by controlling the availability of money and the cost of borrowing new money.  There are numerous ways they can do this (printing, issuing bonds, etc.). The reason one wants some degree of inflation is because employees will never accept a pay cut even when one would significantly improve the overall economy.  Companies often decrease their prices in order to match lower demand, but employees don't usually accept decreased wages for decreased labour demand. A nominal degree of overall money inflation therefore solves this problem.  Employees who get a below-inflation wage increase are actually getting a wage cut. Supply and demand must be matched and some inflation is the inevitable consequence of this. Assuming constant velocity, inflation is caused by the difference between the growth in the money supply and growth in real output. In other words, this means that the money supply growing faster than output is expanding causes inflation to arise. In simple terms, inflation is a result of too much money chasing too few goods, i.e. there is an imbalance between demand and supply. The demand exceeds the supply. With all other things being constant it leads to increase in price, i.e. inflation. I don't think this can be explained in too simple a manner, but I'll try to keep it simple, organized, and concise. We need to start with a basic understanding of inflation. Inflation is the devaluing of currency (in this context) over time. It is used to explain that a $1 today is worth more than a $1 tomorrow. Inflation is explained by straight forward Supply = Demand economics. The value of currency is set at the point where supply (M1 in currency speak) = demand (actual spending). Increasing the supply of currency without increasing the demand will create a surplus of currency and in turn weaken the currency as there is more than is needed (inflation). Now that we understand what inflation is we can understand how it is created. The US Central Bank has set a target of around 2% for inflation annually. Meaning they aim to introduce 2% of M1 into the economy per year. This is where the answer gets complicated. M1 (currency) has a far reaching effect on secondary M2+ (credit) currency that can increase or decrease inflation just as much as M1 can... For example, if you were given $100 (M1) in new money from the Fed you would then deposit that $100 in the bank. The bank would then store 10% (the reserve ratio) in the Fed and lend out $90 (M2) to me on via a personal loan. I would then take that loan and buy a new car. The car dealer will deposit the $90 from my car loan into the bank who would then deposit 10% with The Fed and his bank would lend out $81... And the cycle will repeat... Any change to the amount of liquid currency (be it M1 or M2+) can cause inflation to increase or decrease. So if a nation decides to reduce its US Dollar Reserves that can inject new currency into the market (although the currency has already been printed it wasn't in the market). The currency markets aim to profit on currency imbalances and in reality momentary inflation/deflation between currencies. Your question asks about the mechanism of money inflation - not price inflation.  Money inflation occurs when new money is introduced into an economy.  The value of money is subject to supply and demand like other items in the economy.  The effects of new money can be difficult to predict.  One of the results of additional money can be rising prices.  These rising prices can be concentrated in one particular area - stocks, homes, food - or they can be spread out over many items.  This is true regardless of the form of money being inflated - gold, silver, or paper money.  There were times in history when large discoveries of gold and silver were found that caused prices to rise as a result.  Of course, the large discoveries of gold and silver pale in comparison to the gigantic discoveries by central banks of new fiat currency. An economy produces goods and services and people use money to pay for those goods and services.  Money has value because people believe that they can buy and sell goods and services with it in that economy. How much the value of money is, is determined by how much money there is in comparison to goods and services (supply and demand). In most economies it is the job of the federal/national reserve bank to ensure that prices stay stable (ie the relationship of goods and services to how much money there is is stable); as this is necessary for a well running economy.  The federal reserve bank does so by making more (printing, decreasing interest rates) or less (increasing interest rates) available to the economy. To determine how much money needs to be in the economy to keep prices stable is incredibly hard as many factors have an impact: If the reserve bank gets it wrong and there is more money compared to goods and services than previous, prices will rise to compensate; this is inflation If it's the other way round is deflation. Since it is commonly regarded that deflation is much more destabilizing to an economy than inflation the reserve banks tend to err on the side of inflation.
"Inflation is an attempt to measure how much less money is worth. It is a weighted average of some bundle of goods and services price's increase.  Money's value is in what you can exchange it for, so higher prices means money is worth less. Monthly inflation is quoted either as ""a year, ending on that month"" or ""since the previous month"".  As the values differ by more than a factor of 10, you can usually tell which one is being referred to when they say ""inflation in August was 0.4%, a record high"" or ""inflation in August was 3.6%"".  You do need some context of the state of the economy, and how surprised the people talking about the numbers are.  Sometimes they refer to inflation since the last month, and then annualize it, which adds to the confusion. ""Consumer Inflation""'s value depends on what the basket of goods is, and what you define as the same ""good"".  Is a computer this year the same as the last?  If the computer is 10x faster, do you ignore that, or factor it in? What basket do you use?  The typical monthly consumables purchased by a middle class citizen?  By a poor citizen?  By a rich citizen?  A mixture, and if so which mixture? More detailed inflation figures can focus on inflation facing each quntile of the population by household income, split durable goods from non-durable goods from services, split wage from non-wage inflation, ignore volatile things like food and energy, etc. Inflation doesn't directly cause prices to raise; instead it is a measure of how much raise in prices happened.  It can easily be a self-fullfilling prophesy, as inflation expectations can lead to everyone automatically increasing the price they charge for everything (wages, goods, etc). Inflation can be viewed as a measurement of the ""cost of holding cash"".  At 10% inflation per year, holding a million dollars in cash for a year costs you 100,000$ in buying power.  At 1% inflation it costs 10,000$.  At 0.1% inflation, 1000$. Inflation of 10% in one year, followed by 10% the next, adds up to 1.1*1.1-1 = 21% inflation over the two years.  For low inflation numbers this acts a lot like adding; the further from 0% you get the more the lower-order terms make the result larger.  1% inflation for two years adds up to 2.01%, 10% over two years 21%, 100% over two years 300%, 1000% over two years 12000%, etc.  (and yes, some places suffer 1000% inflation)" "Sensitive topic ;) Inflation is a consequence of the mismatch between supply and demand.  In an ideal world the amount of goods available would exactly match the demand for those goods.   We don't live in an ideal world. One example of oversupply is dollar stores where you can buy remainders from companies that misjudged demand.  Most recently we've seen wheat prices rise as fires outside Moscow damaged the harvest and the Russian government banned exports. And that introduces the danger of inflation. Inflation is a signal, like the pain you feel after an injury.  If you simply took a painkiller you may completely ignore a broken leg until gangrene took your life. Governments sometimes ""ban"" inflation by fixing prices.  Both the Zimbabwean and Venezuelan governments have tried this recently.  The consequence of that is goods become unavailable as producers refuse to create supply for less than the cost of production. As CrimonsX pointed out, governments do desperately want to avoid deflation as much as they want to avoid hyperinflation. There is a ""correct"" level and that has resulted in the monetary policy called ""Inflation targetting"" where central banks attempt to manage inflation into a target range (usually around 2% to 6%). The reason is simply that limited inflation drives investment and consumption.  With a guaranteed return on investment people with cash will lend it to people with ideas.  Consumers will buy goods today if they fear that the price will rise tomorrow. If prices fall (as they have done during the two decades of deflation in Japan) then the result is lower levels of investment and employment as companies cut production capacity.  If prices rise to quickly (as in Zimbabwe and Venezuela) then people cannot save enough or earn enough and so their wealth is drained away. Add to this the continual process of innovation and you see how difficult it is to manage inflation at all.  Innovation can result in increased efficiency which can reduce prices.  It can also result in a new product which is sufficiently unique to allow predatory pricing (the Apple iPhone, new types of medicines, and so on). The best mechanism we have for figuring out where money should be invested and who is the best recipient of any good is the price mechanism.  Inflation is the signal that investors need to learn how best to manage their efforts. We hide from it at our peril." "Krugman argues (and I agree with him on this one) that this is a telltale sign that the US is in a [liquidity trap](http://en.wikipedia.org/wiki/Liquidity_trap). Basically interest rates are near 0 and the banks are very risk adverse right now, so they sit on reserves instead of lending them out. In this scenario, the government ""printing"" money has no effect on inflation (or much of anything) because it just sits in bank reserves.  A more right wing economist might spin a different story though." I was being sarcastic in response to you saying that hyperinflation happens every 30-50 years in a finance subreddit.. where the second lesson (right after time value of money) is that past results in general tell us nothing about the future. The fed has $2 trillion m0, and they loan out $1.9 trillion which then is eventually makes it way back to their banksagain, which they loan out another $1.8 trillion. The money goes to whoever they are loaning it to. The m0 is determined by the treasury directly printing 0's and 1s, and putting it into the Fed's bank which then they loan out. That's last part is what quantitative easing is.  In short, the treasurys at the top, then the fed, then the branch banks, then corporations then the executives then the middle/lower class. Generally. When the treasury prints the money it trickles down. Problem is the higher up in the tree the more purchasing power you have, the lower the less.  Comparing it to the spanish inquisition wouldn't be far off. Perhaps someday the government will let the people choose their own currency. Inflation is theft!  It is caused when banks lend money that someone deposited, but still has claim to - called fractional reserve banking.   On top of that, the Federal Reserve Bank (in the US) or the Central Bank of the currency (i.e. Bank of Japan, European Central Bank, etc.) can increase the monetary base by writing checks out of thin air to purchase debt, such as US Treasury Bonds. Inflation is not a natural phenomenon, it is completely man-made, and is caused solely by the two methods above. Inflation causes the business cycle.  Lower interest rates caused by inflation cause long-term investment, even while savings is actually low and consumption is high.  This causes prices to rise rapidly (the boom), and eventually, when the realization is made that the savings is not there to consume the products of the investment, you get the bust. I would encourage you to read or listen to The Case Against the Fed by Murray N. Rothbard - Great book, free online or via iTunes. It can take a while for inflation to seep into all aspects an economy and be felt by a consumer. Often, things that consumers use the most (like gasoline, wheat products, corn products, soy products, and sugar), are commodities spread across global markets with their own pricing which may be impacted by inflation in any given country.  Also, inflation can be beneficial in some ways. A $500/month mortgage payment was a big deal 30 years ago, and now would be considered trivial. That's entirely because of inflation.  Run-away inflation, where people are burning the currency to stay warm, is a different beast altogether. Be wary of people who conflate inflation, consumer pricing, and destructive currency devaluation, because they're not the same things. "Disregarding the particular example and focusing on the actual questions: YES, definitely, the whole concept of ""pump and dump scheme"" refers to the many cases when this was intentionally done; Everything has a limit, but the limit can be quite high, especially if starting from a low value (a penny stock) and if the stock is low volume, then inflating ten or hundred times over a real value may be possible; and any value might be infinitely times overvalued for a company that turns out to have a value of zero. Yes, unless it's done very blatantly, you should expect that the ""inflator"" has much more experience in hiding the signs of inflation than the skill of average investor to notice them." let's define inflation as an increase in m1 relative to the goods and services in the dollar economy. twist doesn't change m1 because it is sterilized.  it does make tsys attractive since it supports their prices.  that means de-risking flows are to the u.s.  that means dollar goes up.  that means gold goes down. &gt; *I fail to see how moderate inflation is a bad thing*  The purchasing power of the currency slowly erodes, which means people's savings melt away.  So people are forced to invest into something they don't really understand and something that is completely rigged, instead of just having their savings in a currency.  [USD purchasing power](http://3.bp.blogspot.com/-mAg6FMpNGpM/Ta9ICcEMonI/AAAAAAAABBM/UoQG8vxtBX0/s1600/U.S.%2BDollar%2BPurchasing%2BPower.jpg). The general discussion of inflation centers on money as a medium of exchange and a store of value. It is impossible to discuss inflation without considering time, since it is a comparison between the balance between money and goods at two points in time. The whole point of using money, rather than bartering goods, is to have a medium of exchange. Having money, you are interested in the buying power of the money in general more than the relative price of a specific commodity. If some supply distortion causes a shortage of tobacco, or gasoline, or rental properties, the price of each will go up. However, if the amount of circulating money is doubled, the price of everything will be bid up because there is more money chasing the same amount of wealth. The persons who get to introduce the additional circulating money will win at the expense of those who already hold cash. Most of the public measures that are used to describe the economy are highly suspect. For example, during the 90s, the federal government ceased using a constant market basket when computing CPI, allowing substitutions. With this, it was no longer possible to make consistent comparisons over time. The so-called Core CPI is even worse, as it excludes food and energy, which is fine provided you don't eat anything or use any energy. Therefore, when discussing CPI, it is important to understand what exactly is being measured and how. Most published statistics understate inflation. "And where does, say, Federal reserve, gets the money to buy those [2.5 trillions](https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124)?   As for ""inflationary pressure"" - we don't really know it. Those money circulate between various financial instruments  - so it is a very big question whether or not they spill out to affect consumer prices." So this method makes sense and is reasonable and possible.  The money multiplier effect ends up capped by the fact that the bank can only lend a percent of its 'cash'.    My issue understanding this is I've been told that banks actually don't hold 10% of the cash and lend the other 90% but instead hold the full 100% in cash and lend 900%.  Is this accurate?  The issue I see with it is that it becomes exponential growth that is uncapped.  If the bank lends 900%, it has created this money from nothing, which by itself isn't different that the bank loaning 90% and keeping 10%.  The issue comes because the next bank who gets that money deposited will treat that amount as cash as well, so they loan 900% of the 900%.  And so on and so forth.  How does the system prevent this from happening? This is similar to the overnight lending rate set by the US Federal Reserve Board. If money is more expensive to borrow (higher interest rate) then less will be borrowed.  Commercial and consumer loan rates follow up or down via market pressures (though possibly to a lesser extent in China) to adjust to the new central bank rate. Money creation is driven in part by fractional reserve banking: banks are required to have but a small percentage of deposits on hand in cash, and the rest can be lent out, deposited in another bank that has the same fractional reserve requirement, and that money can be lent out, etc.  Higher interest rates dampen this lending activity, so inflation is toned down. You need a blog, or a thread of your own. I want to learn about this, and you appear to be quite knowledgeable and thorough in your explanations. Would it be possible for you to make a thread, or reply, or pm explaining some of the pro's and cons of fiat money?