Inflation - More Beer Bottles Than Beer
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Interesting how handy beer is for describing money.
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There's an inflation relationship between printing bills, the labor that creates dollars and inflation. The ideal relationship, which the Federal Reserve doesn't like, is to have the number of bills that equals the amount of dollars labor created. If labor created 10,000 dollars of money, then 100 $100 bills would be an exact match. But what happens when there 200 $100 bills and labor has only created 10,000 dollars? To the beer.
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In an ideal match, labor creates 10,000 ounces of beer and government makes 100 BB100 bottles. Each bottle contains 100 ounces of beer. Perfect. Now government makes another 100 BB100 bottles, but labor hasn't produced any more beer. What happens?
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Here's where economic magic happens. The number of ounces of beer in the economy will always be evenly distributed to ALL of the beer bottles that are in the economy. So 10,000 ounces of beer and 100 BB100 bottles, every bottle has 100 ounces of beer. Every bottle is full. Add another 100 BB100 bottles to the economy and economic magic puts 50 ounces of beer in 200 BB100 bottles. Every bottle, the original 100 and the additional 100, is magically half full.
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Here's a graph of the actual BB100 bottle inflation for 1947-2018. The size of the bottle doesn't change. The amount of beer in it does.
Let's do the same thing with bills and dollars.
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In an ideal match, labor creates 10,000 dollars and government prints 100 $100 bills. Each $100 bill contains 100 dollars. Perfect. Now government prints another 100 $100 bills, but labor hasn't produced any more dollars, still just 10,000 dollars. What happens?
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Economic magic. The number of dollars in the economy will always be evenly distributed to ALL bills that are in the economy. So 10,000 dollars and 100 $100 bills, every $100 bill contains 100 dollars. Add another 100 $100 bills to the economy and economic magic puts 50 dollars in 200 $100 bills.
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You have two $100 bills in your pocket. Before the additional printing (every $100 contains 100 dollars), you took out one $100 bill and bought 100 things. Each thing cost one dollar. After the printing (every $100 contains 50 dollars), you took out the other $100 bill and bought 50 things. Each thing still cost one dollar.
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You didn't trade the $100 bill that contained 100 dollars for one that only contained 50 dollars. One day that bill contained 100 dollars, another day it contained 50 dollars. That's how sneaky inflation is.
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Here's a graph of the actual $100 bill inflation for 1947-2018. The number on the bill doesn't change. The number of dollars in the bill does.
​Notice how the 100 ounce beer bottle and $100 bill graphs are identical. You can use a beer bottle and beer to understand a bill and dollars. Food for thought for the next bar stool.
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I mentioned that the Federal Reserve doesn't like to keep things equal. It will move mountains to have at least 2% inflation each year because it is deathly afraid of deflation. That's a different piece to write.
If you're curious what 2% annual inflation would look like from 1947 to 2020, see the graph below. This isn't the actual inflation for every year, like the graphs above. This is just an example of 2% annual inflation. The number on the bill doesn't change. The number of dollars in the bill does.
Just a fellow American