Duck Tales Inflation Lesson

["User"]

[DZComposer]

Meh, this mashup takes the simple-minded view that a reserve banking system has to cause inflation because of the money multiplier effect.

Some inflation is good, but hyperinflation (as seen in the video, or IRL, in Zimbabwe [many toilets in neighboring countries have signs saying don't use "zim dollars" as toilet paper because they clog toilets, IE it is cheaper to wipe your ass with money than it is to buy toilet paper]) can be a catastrophe.

The problem with gold, as the think tank that put this together wants to go back to, is that it has a relatively fixed value. While that sounds good on paper, the problem with it is that it has a major inflation risk of it's own: The gold supply. If a vast quantity of gold is discovered, it will cause inflation.

But, an even bigger problem, is the risk of Deflation. Deflation is the increase of value of money. Sounds like a good thing on paper, but in reality it is a very bad thing as money becomes scarce. One of the hallmarks of the great depression was serious deflation. Due to it's static value, if the economy starts booming, you're on a train to deflation as the economy starts to grow faster than the gold supply. The total value of the world's gold is about $4.5 trillion. That's less than the amount of cash in circulation, much less the economy as a whole.

["User"]

Yeah, I don't completely agree with a lot of what this video wants us to believe either.

Also, for our members who may not know - another thing that heavily influences commodity prices (which are valued in U.S. dollars) is the value of the greenback itself - since it's the world's main reserve currency and prices worldwide will fluctuate greatly depending on how the U.S. economy itself is doing.  One of the reasons why gold per ounce and oil per barrel (which in turn translates into higher gas prices) is so high right now is because the U.S. dollar (compared to a basket of other main currencies globally) is weak.  If the greenback appreciates in value due to the economy or other factors these prices should drop off over the long run.

[DZComposer]

Another issue with the video is that it presents the fractional reserve banking system as something that creates money out of thin air. That is not true.

In the cartoon, a duplicator was used on money ad-infinitum until it caused hyperinflation. While hyperinflation can occur in a FRS, it isn't inevitable like using the duplicator.

The money is created by something called the money multiplier. It works based off of the basic banking cycle.

The basic banking cycle is this:

Customers deposit money in bank -> Banks use a portion of deposits to make loans -> Lent money is used in manners that eventually pay other customers -> start over

I'm going to create an incredibly simplified example:

Let's say I live in the country of DZLand. I decide to open a bank.

A wealthy citizen deposits 1,000,000DZ$ into my bank.

I lend an entrepreneur 900,000DZ$. (I need to leave some for the depositor to use)

He starts his business, and all 900,000DZ$ comes back as deposits in other accounts (I'm the only bank in the country)

So, I lend out $810,000DZ$. It comes back.

Etc. So far, the banking cycle.

But, if I look at my balance sheet, it shows I have a total of  2,710,000DZ$ in deposits! It all came from that initial 1,000,000DZ$. (the extra 1.71 million DZ$ is also recorded  as loans). If you add up the differences between the loans and deposits, you should get $1,000,000.

This is the money multiplier. In the real world, it is more complicated, but this is the basic idea. The money DOES NOT come out of thin air. It sounds inflationary at first, but as long as the borrowed money is used in an economically stimulative way (say one of the borrowers down the lane starts a delivery service with it, allowing the original entrepreneur to be more efficient and increase his profits), and most of the loans are paid off. It is actually a very very efficient economic engine that is actually resistant to inflation.

Of course, once you throw in commodities speculation and other Wall St. shenanigans, the system can be broken. But that's the fault of Wall St, not the system.

The Fed has the power to stop this stuff, but when all of the Fed board members are Wall St guys, they tend to look out for their own kind rather than the system. The problem isn't that the Fed exists, it's who is running it.

EDIT:

Here is a more visual explanation:

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