@ davis I now understand why inflation is necessary . Thanks for the insight . . . So at this rate, with increase in population/consumers, 'new' money has to be created . . .all am wondering is if it is sustainable in the long run. It appears we are trying to allow everyone access to money to purchase / access resources . . .so the currency will always have to be reviewed in terms of value to acquire a balance for accurate representation of wealth in the money . . . Stan's analogy holds a lot of truth . .we have come to assign value to money instead of what it represents . . . On 5/24/10, Davis Waithaka <daviswaithaka@gmail.com> wrote:
@Ndungi
Remember that money is just a form of transfer of wealth... from my earlier post. An economy has to have a certain level of money in circulation for us to conveniently convert our wealths. Since our wealths grow (eg a doctor becomes better with experience hence his total 'medical wealth' grows from year to year) (also, the number of doctors is increasing) then we constantly need to keep raising the levels of money - again to ensure convenient wealth conversions. However, the value (wealth) locked in one particular item in the economy, eg a loaf of bread remains constant. Thus, when you raise the money in circulation and try to price the loaf of bread, its price shifts. If the increase in money circulated is higher than the loaves of bread increased, then the price might rise naturally (inflation) whilst the reverse might also be true (deflation).
If we had 1 trillion shillings in circulation in 2009 and the economy produces 1 million loaves of bread then the price is 30/= for bread If we have 2 trillion shillings in circulation in 2011 and the economy then produces 1.5 million loaves of bread then the price will be ~38/= (remember there are other products being manufactured or services delivered and they are probably also growing with new ones entering hence affecting demand for bread etc)
Davis
-- Regards, Mark Mwangi http://mwangy.blogspot.com Skype : mark.mwangy