By Gerardo Coco: We face one of the deepest crises
in history. A prognosis for the economic future requires a deepening of
the concepts of inflation and deflation. Without understanding their
dynamic relationship and their implications is difficult to predict how
things might unfold. The economic future depends on the interplay of
both these forces. From the point of view of their final effects,
inflation and deflation are, respectively, the devaluation and
revaluation of the currency unit. The quantity theory of money developed
in 1912 by the American economist Irving Fisher asserts that an
increase in the money supply, all other things been equal, results in a
proportional increase in the price level [1]. If the circulation of
money signifies the aggregate amount of its transfers against goods, its
increase must result in a price increase of all the goods. The theory
must be viewed through the lens of the law of supply and demand: if
money is abundant and goods are scarce, their prices increase and
currency depreciates. Inflation rises when the monetary aggregate
expands faster than goods. Conversely, if money is scarce, prices fall
and the opposite, deflation, occurs. In this case the monetary aggregate
shrinks faster than goods and as prices decrease money appreciates.Inflation is a political phenomenon because monetary aggregates are not determined by market forces but are planned by central banks in agreement with governments. It is in fact connected with the monetary expansion to fund their deficits. Inflation raises the demand for goods and decreases the demand for money; it increases aggregate spending and money velocity as the ratio between GDP and the amount of money in circulation which expresses the rapidity with which the monetary unit is spent and re-spent until it remains in existence.
There is no such things as demand-pull inflation or cost-push inflation. Provided that the quantity of money does not increase, if cost or demand for some goods changes, demand for other goods must necessarily adjust, leaving unchanged the amount of spending and the money aggregate in the economic system. If some people spend more, others have to spend less, thus leaving the purchasing power unaltered. The cause of inflation is nothing but money manipulation.




