This will be the first of an article series on money and economic issues. The article will be in a Frequently Asked Questions (FAQ) format. St. Louis investors are reminded that investment knowledge is more than just superficial.
What is money?
I define money as a medium of exchange, that is a unit of account (something measurable), and is a direct store or representation of wealth. We use money for the payment of goods and services and for the repayment of debt. Our money today (Federal Reserve Notes) does not fit one of these criteria since it is not a direct store or representation of wealth. Our money is legal tender (decreed by law) to be used for all debts public and private. This represents a great departure from what money once was. Much of what operates as money today is really credit.
What is inflation?
Inflation is an increase in the amount of money or credit. The inflation we have witnessed is primarily a product of credit creation. Credit is an IOU or an obligation to pay dollars (or another currency). Our dollars are representations of wealth and not real wealth. Our dollars are Federal Reserve Notes created by a central bank that are legal tender and thus represent IOUs themselves. When the supply of these IOUs expands, prices rise. Price increases are how the public experiences inflation.
What is deflation?
Deflation is a reduction in the amount of outstanding credit. A consequence of this deflation is the observance of lower prices. In recent times, deflation has been very evident in the residential real estate market. In deflation, the existing supply of credit or money becomes more valuable since there is less of it. Outstanding debt becomes harder to service. Cash is king.
Jim Mosquera is the author of Escaping Oz: Protecting your wealth during the financial crisis and is the publisher of The Sentinel Financial Report.
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