BilPrestonEsq said:
Banks you know are allowed by law to loan 9/10ths of there reserves if I remember correctly. Thats why starting a 'bank run' is illegal because if everyone took there money out of the bank it would all become worthless, we would realize that its all an illusion. How about we take the money we want to put in the bank and buy cds that way they can loan out the money for people to build or whatever. That would be the honest way of banking. there's no such thing as free banking or free anything, members of the physics forum should know that :)Inflation is a *****. Why would I save my money when in 25 years it will be worth half as much? I would be better off buying gold or something of real value. Just my two cents on the banking sytem.
Inflation is the result of a "hot" economy, while deflation comes from a "cooling" economy. Investment results in spending to the extent that money invested get paid out for labor and materials used in production processes. As the money is spent, it creates revenues and income. It is this enrichment cycle of spending and receiving money that pushes resource-utilization, including that of human capital (i.e. labor time) to its limits. As these limits are neared, scarcity appears on the horizon and this scarcity causes suppliers/producers to raise their costs in order to maximize revenue per unit sold. Just think of a busy person, swamped with orders for whatever they produce with their labor. Rather than continuing to lower the asking price for their labor to solicit more work, they raise it until their work orders begin decreasing to levels below their desired workload. If their work orders are decreasing, they will do the reverse and lower their price until they start getting orders again.
Saving, to the extent that it prevents spending has a "cooling" (i.e. deflationary or anti-inflationary) effect on economies. When saved money is spent or invested and thereby spent, it has a stoking effect on the economy. Obviously the stoking effect varies according to how the money is spent, what is the produced, and inflation is most likely when the products of investment/spending are less efficient, because the net effect is no change or net loss of productivity and use-value of goods and services.
When investment/spending is productive, the amount of value produced per unit resource-utilization goes up and this translates into a higher ratio of value to spending, which is deflation. When the ratio of spending to value-attained goes up, this is inflation. So saving money promotes deflation (or resists inflation) while spending promotes inflation. If many people would ask "what's the point of saving when my money's not going to be worth as much in the future?" they could give up on saving, and this would contribute to inflation.
If, on the other hand, people gain the resolve to increase their productivity, save, and discipline their spending, deflationary pressure is the result, which is the same as the value of money increasing. The problem with this is that there is resistance to maintaining or increasing productivity while revenues/income is decreasing. People/firms think, "if I am getting less money, I'm not going to work/produce as much," and this contributes to a decrease in value per unit spending in the economy, which causes inflationary pressure.
The real interesting part is not so much analyzing what causes inflation/deflation and GDP growth. What's really interesting is analyzing what constitutes value and how value can be increased while expenditures and costs are reduced. Presumably, an economy that evolves in terms of efficiency and substitutes that render more value with less expenditures (money, resources, and energy) would be more productive and beneficial to all, as long as the deflation and savings didn't reach the point of excluding people from access to the means of maintaining their health and basic necessities (i.e. a certain level of basic welfare). Once that point of exclusion is reached, human capital is being lost through deterioration.
