Tag: Currency

What is Inflation?

The Meaning of Inflation: More than Just Rising Prices

Inflation is a term that has been frequently discussed in Germany lately, especially due to rising prices. But what does inflation really mean? It is crucial to understand that inflation is not just an increase in prices, but rather an expansion of the money supply. This expansion is carried out by the central bank, in our case, the European Central Bank, to meet the financial needs of the government. The role of the central bank is particularly significant because it is directly linked to monetary policy and, consequently, the inflation rate.

The Role of the Central Bank and Politics in Inflation

Why does the central bank print more money instead of raising taxes? The reason often lies in the fact that increasing taxes is politically challenging, especially when taxes are already high. On the other hand, increasing the money supply is less obvious and is often not directly noticed by the general public. This allows the government to secure the necessary funding without provoking direct resistance. However, the relationship between money supply and prices is clear: when more money is put into circulation, prices rise, and understanding this dynamic is crucial for understanding inflation.

The Long-Term Consequences of Expanding the Money Supply

The consequences of a continuously growing money supply are severe and affect the entire population. Inflation not only leads to rising prices but also to the devaluation of savings and long-term assets such as pension plans. History provides numerous examples where states, in times of crisis, suspended the link between their currency and stable standards like gold to finance wars or other large projects. This monetary policy invariably led to the devaluation of the currency, with the citizens ultimately bearing the costs. It is therefore of utmost importance that the public understands what inflation really is and who is responsible for it.
In conclusion, inflation is primarily an expansion of the money supply, leading to price increases. It is not just an economic challenge but also a matter of the government’s responsibility towards its citizens. A correct understanding of this term is essential to take the right measures against inflation.

 
 
 
Link to the YouTube video with English subtitles

The 3 Functions of a Currency

The Importance of Money in the Modern Economy

Money plays a central role in our daily lives and in the economy as a whole. We spend a significant portion of our time earning and spending money, often without fully understanding how it is created or who controls it. Money is not just a simple medium of exchange but a fundamental component of a functioning economy.

The Three Main Functions of Money

Money has three central functions in the economy: It serves as a medium of exchange, a unit of account, and a store of value. As a medium of exchange, it facilitates the trade of goods and services without the need for direct barter. As a unit of account, it helps compare the value of different goods and services. Finally, it serves as a store of value, allowing money to be saved over time without losing its value.
In a functioning economy, these functions play crucial roles. Without money, people would need to barter directly, which is nearly impossible in a complex society. The function of a unit of account allows for price comparisons and informed economic decisions, while the store of value function underpins saving and investment.

Trust as the Foundation of Currency

The value of money is fundamentally based on the population’s trust in its stability. This trust is supported by government legislation and the economy’s ability to provide goods and services. As long as people are confident that their money will maintain a stable value in the future, the currency remains functional.
An example of the importance of trust can be seen in the former East Germany (DDR). There, state control and manipulation of the currency led to a loss of trust in money. The result was an inefficient economy where money no longer adequately fulfilled its functions.

The Dangers of Currency Manipulation

History shows that the manipulation of currencies can lead to severe economic crises in the long term. When governments increase the money supply to achieve short-term goals, people lose trust in the currency’s stability. A well-known example is the Roman Empire, whose decline was partly hastened by the gradual reduction of gold content in its coins.
Manipulative monetary policies may bring short-term benefits but lead to inflation, loss of value, and economic instability in the long run. This illustrates how crucial a stable and trustworthy currency is for the health of an economy.

 
 
 
Link to the YouTube video with English subtitles