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<p>[QUOTE=&quot;GeorgeM, post: 1251218, member: 28550&quot;]Care to explain?</p><p><br /></p><p>If the money supply stays the same and the supply of items declines, what do you think will happen to prices? In other words, if the price of a loaf of bread goes from 1 denari to 2 denari, that&#039;s inflation (and I think anyone else reading this gets that pretty clearly because they know what inflation means and you&#039;re using a circular definition). </p><p><br /></p><p>Inflation is defined as the process by which they buying power of money is reduced over time.&nbsp; I agree with you that printing large amounts of currency while the economy stays the same size (or even grows at a slower rate than the money supply grows) can cause inflation. But, that&#039;s only one way that inflation occurs.</p><p><br /></p><p>In the modern era, we have a lot of things going on that are deflationary by nature. Technology and applied knowledge are deflationary in nature - just look at the cost of a 33 mhz computer from 1995 to 2010 (my first PC had less computing power than the average cell phone does today). Likewise, the average acre of corn yields about 300% what it did a century ago (or more). For the same inputs (labor, capital, land), we&#039;re able to produce larger outputs. This is defined as efficiency. As efficiency grows, price of output tends to decline (but not always: there are depletable resources like oil that illustrate that pretty clearly). </p><p><br /></p><p>Let&#039;s look at another example. You live on an island with 5 people. There&#039;s no trade with the outside world, but your community uses a stash of 1,000 gold coins to transact daily business. Your neighbor Bob raises corn and other crops, your neighbor Tim is the barber/dentist/doctor, your neighbor Sue brews whiskey, your neighbor Janet raises pigs and provides entertainment, and you do all the odd jobs that the others can&#039;t. One day, you&#039;re digging in your yard and find another 1,000 gold coins (doubling the money supply). What will be the result on prices on the island? </p><p><br /></p><p>This is essentially what happened in boomtowns in the American West during the Gold Rush and in Spain in the 2 centuries after the conquest of the New World. The money supply increased faster than the supply of goods in the economy. Presto, whamo, inflation occurred (even with a non-fiat currency).[/QUOTE]</p><p><br /></p>

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