A Ducky Inflation

This short cartoon depicts a monetary phenomenon known as “Inflation”. Inflation is basically the decrease in the value of money or the increase in the value of goods and services.

There are different types of inflation, but in align with the content of the cartoon, we will look at the simplest form of inflation. It is bound to occur when the central bank prints too much money, exceeding the rate of production growth. Thus, having too much money within the economy is not always a good thing. Why?

Because you don’t eat money. Money is not an end, but a means to attain various goods and services to fulfill your wants and needs.

Think of a free market economy where the only product available is apple. Let’s assume that we have 1000 apples at $1 each. In that imaginary economy, assume we have 1000 people, each is bestowed with $1. This implies that everyone only has an apple to consume because each person only has $1 available. But, what if suddenly everyone is given $1 more (thus, end up with $2 at hand).

This increases their purchasing power, and you might think that it allows people to buy 2 apples. But, the truth remains that we only have 1000 apples. So, with competition among consumers, it is not possible for 1 person to buy 2 apples. Why? Because if that is the case, 500 people will get 2 apples and the other 500 will end up having worthless $2. No sane person is willing to save useless $2 and starve oneself. Remember, apple is the only product available in that economy. For this reason, everyone will end up competing for apple, bidding up its price until they can no longer do so. The price will eventually, given time, end up at $2 per apple.

In the end, giving people additional dollar does not make them any better off, not when the amount of real economic output (apple) remains the same at 1000. Everyone will still end up being able to buy only 1 apple.

This is, my friends, why printing money (or, in fancy economic term, QE or Quantitative Easing) can be harmful if not carried out with precaution. For the same reason, it is exactly why people don’t use rocks or leaves as money (because there are countless of them everywhere, thus eroding their purchasing power to almost nothing if used as money). Think of having to pay a million rocks for a candy. Ouch!

Well, that’s all folks. I think, to have Walt Disney going all the way of making a Donald Duck cartoon about inflation, economics must have been a sexy topic even back then. It will only get sexier as time passes!