What is inflation? The general flow of the process is as follows: as prices rise, wages rise as well. Wages rise in tandem with price increases. This is known as the Wage Price Spiral, in which prices are always rising. Whose fault is this, anyway? Some may blame the labor unions, saying they should be held accountable because they constantly demand higher wages without putting in more effort. Some will blame the large company for the problem, claiming that avaricious capitalists are to blame for their constant price increases.

The truth is that neither big businesses nor unions cause inflation. Inflation is not the Wage Price Spiral.

If we take the wage part in the Wage Price Spiral, let us say that there is a job list for 90 of us. And it will take each and every one of us one hour to do the job. And the employer has a plate of 90 biscuits on a plate, waiting for us once we report back in an hour’s time. Imagine that one biscuit represents the wage for each of us. So, we go out to do our job and in an hour’s time, we are back and each and every one of us, gets a biscuit. The day after, the same thing is repeated. But one of us is not happy with one biscuit for picking up the trash and complains of wanting two biscuits. And the rest jump on the bandwagon, asking for two biscuits too! But the employer only has 90 biscuits while the group of 90 wants 180 biscuits. What is the solution? The employer can either give two biscuits to 45 while the rest are out of work. Or, the employer has to go to the kitchen and bake another 90 biscuits.

In the large economy, everything is precisely as it is. There are plenty of euros to pay the salary in if you want your pay to increase from €2 to €4 per hour. What then occurs? I need to have more money to cover the increase in wages if I’m going to give everyone more money, isn’t that right? This is the nature of physics. Thus, the money supply is raised by the government. In 1932, there were $156 in circulation in the US for each man, woman, and child. Since then, the government has been printing money at an increasing rate in accordance with John Maynard Keynes’ thesis. In the United States today, there is more money in circulation for each man, woman, and child. Stated differently, the government went to the kitchen and continued to bake biscuits.

However, what has transpired during this time? You don’t spend a few euros to see a movie. You no longer purchase bananas by the kilogram for the same price as you did a while back. And this is the Wage Price Spiral’s wage component. All people’s wages cannot be raised generally unless there is an increase in the available funds. Isn’t that a straightforward formula?

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