Readers of my blog have often heard me proclaim my faith in basic economics.  I still have that faith.  At it’s most basic level, here’s what I believe:

• every person on earth wants to improve his or her family’s standard of living
• the more scarce something is (goods, talent, labor), the higher its value
• we obtain things that we want by providing somebody else something they want
• rather than exchanging chickens for gasoline, and labor for nails, we use a “medium of exchange”

Macroeconomics makes sense as long as we have a medium of exchange that we can trade back and forth with each other, and we all agree on its relative value.  Here in the United States we use dollars.

Sam’s employer will give him twenty dollars for loading a truck for an hour.  Sam will give twenty dollars to the pet store for a bag of dog food.  The store will give twenty dollars to the utility company for an hour’s worth of electricity.   It works great as long as we all agree on the relative worth of twenty dollars.

Here’s where it gets tricky.  Twenty dollars is a piece of paper in your pocket.  You can’t eat it.  It won’t keep you warm.  It has no intrinsic worth at all.  There was a time when that piece of paper could be exchanged for gold (a scarce commodity) at our national treasury, but those days are gone.  Now a twenty-dollar bill is nothing more than an IOU – a promise to pay.

Unlike you, the government does not create any wealth.  It can take IOUs from one person and give them to another person.  And if that’s all it did, the economy would still work.  But the government now gives out more IOUs than it takes in.  It can do that, because it can print IOUs.

Stick with me now.

It should follow that the more IOUs that are out there, the less each one is worth.  Supply and demand, right?

If this were not true, NONE OF US WOULD EVER HAVE TO WORK AGAIN.  We could just print as many IOUs as it takes to buy whatever we want, just like our government is doing now!

But our government continues to tell us that there is no inflation, they don’t expect inflation, and everything is under control.

You’d have to believe in magic . . .

Tom Balek – Rockin’ On the Right Side

You have to believe we are magic
Nothin’ can stand in our way
You have to believe we are magic
Don’t let your aim ever stray
And if all your hopes survive, destiny will arrive
I’ll bring all your dreams alive, for you