Inflation

Inflation along with all its dangers has been with humankind for as long as recorded history. The earliest writings about it can be found in the Holy Bible and date back to approximately 5,000 years before the birth of Christ. None other than King Solomon created this first recorded dangerous inflation, according to the bible, when he began assembling all the materials to build the Temple. It had a disastrous end as well as the Temple was later destroyed when the children of Israel were conquered and carried into captivity in Babylon.

From this point forward inflation has been a destroyer of nations on the earth as the records of history reveal. However, not all inflation is necessarily bad for the economic outlook of nations. Rather it's the failure to control inflation in an orderly manner that causes the disasters like we've seen recently in Russia, the Philippines and other countries of the world. Furthermore, inflation can be caused from within a country or it can be caused by factors outside the country's ability to control them. This is what has happened in many of the modern instances where economies have been ruined under the crush of inflation.

Inflation too affects many others as it radiates outward from whatever its source might be. Therefore it's important that we understand some of the terms we hear, almost daily on the news, and read in newspapers concern what exactly inflation is. And, in some cases what inflation is not.

An economy whether it be a free enterprise one or a rigidly controlled one like the Chinese economy is in reality a dynamic business that operates in what are known as business cycles. These cycles represent the changes in the economy and since the Industrial Revolution the level of business activity in all countries veers from high to low taking the economy with it.

The timing for these cycles is far from predictable occurrences but Economists, people that study and advise authorities about the economy, all seem to cite four distinct phases or cycles within business. These are the phase of Prosperity, usually followed by the phase of Liquidation, which is followed by the phase of Depression and finally then comes the phase of Recovery.

During the Prosperity phase of a business cycle within any economy there is a rise in production in all areas. Employment, wages, and profits also increase correspondingly. Many business owners whether public or private also expand their businesses during the Prosperity phase to further increase production and thus profits. As the Prosperity continues however obstacles begin to occur that put limits or impede the progress in some form or another.

For example, production costs can rise (higher wages), shortages of raw materials might impede progress, interest rates can rise on money borrowed by businesses and employees to finance expansions and purchase products. This then triggers the phase of Liquidation.

During the Liquidation phase because of the higher interest rates, rises in prices for goods the consumers react by slowing their purchases and buy dramatically less of everything. As consumption begins to lag behind production surpluses begin to build and businesses are then forced to Liquidate these overages in order to keep current with their obligations. During this Liquidation period too quite often there are massive lay off for the workers thus the economy tightens its belt even further.

As this process continues to deepen manufacturers begin to retrench and business executives allow prices to drop in order to liquidate their inventories at the highest possible dollar. When this condition continues to worsen, factories begin closing, workers are displaced, businesses close their doors, money lenders tighten the requirements for borrowing, people hoard money and a Depression then is in full swing.

Furthermore, it's during the Depression Phase that a nation becomes more vulnerable to outside aggression from their enemies. Depression furthermore can bring on vast political changes within nations thus adding to their vulnerability as seen from an aggressor's point of view. History from the Middle Ages forward to the present have copious examples of nations being conquered or just swallowed up by greater powers while they are in a Depression cycle. However, like the cycles before it this one will end and over time the whole process begins to repeat itself.

If only economies could limit themselves to these four business cycles life would be much less complex than what we see in today's modern global and national economies. Just two added factors to the business cycle, those of Inflation and Deflation in modern times can be triggered by many and varied and sometimes quite subtle changes. Changes that before controls can be put into place the entire economy of an area, region, state or nation or even group of nations can be ruined by the crush of either Inflation or Deflation.

There are generally three forms of Inflation. First we have what is known as creeping Inflation where the upward trend of prices is gradual and irregular, averaging only a few percentage points each year. In many cases this creeping Inflation stimulates economic growth as we have seen over the last six or seven years here in the United States. Another factor here is that our government and many private companies index their growth patterns with the annual small percentage rise in inflation. This is why you hear from Grandpa and Grandma that a dollar just doesn't but what it did in their day. And, they are correct but they are also better off for it too.

The greater danger of creeping Inflation is that it lulls the businesses and consumers into a false sense of security and before long the second business cycle kicks in. The illusion of personal income growth beyond actual productivity may encourage consumption; housing investment may increase in anticipation of future price appreciation; business investment in plants and equipment may accelerate as prices rise more rapidly than costs; and personal, business and government borrowers realize that loans will be repaid with money that has potentially less purchasing power.

The great concern with the foregoing creeping Inflation is that there can easily set in a period of a growing pattern of chronic Inflation which is exhibited by much higher price increases, at annual rates of 10 to 30 percent in some nations and even 100 percent or more in a few developing countries. Chronic Inflation tends to become permanent and ratchets upward to higher levels as economic distortions and negative expectations accumulate. To counter this chronic Inflation normal economic activities are disrupted. Consumers by goods and services to avoid higher prices. Real Estate speculation increases. Businesses concentrate on short-term