LYCOS RETRIEVER 
Inflation: Money
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Inflation quietly steals from investors as it errodes real savings and real investment returns. The goal of investors is to increase purchasing power from one year to the next, or at least preserve it. So if an inflation rate of 3% means that you can buy 3% less goods with your money, then you have to earn an investment return of 3% just to break even! Earn 2% and your Real Return(-1%) is negative!
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Supply-side economics asserts that inflation is caused by either an increase in the supply of money or a decrease in the demand for balances of money. Thus the inflation experienced during the Black Plague in medieval Europe is seen as being caused by a decrease in the demand for money, the money stock used was gold coin and it was relatively fixed, while inflation in the 1970s is regarded as initially caused by an increased supply of money that occurred following the U.S. exit from the Bretton Woods gold standard. Supply-side economics asserts that the money supply can grow without causing inflation as long as the demand for balances of money ... grows.
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Workers may agree to a 2 percent pay rise in an economy with 3 percent inflation. They are unlikely to accept a pay cut even when inflation is zero or less. This is called the "money illusion". Admittedly, it is less pronounced when compensation is linked to performance. Thus, according to "The Economist", Japanese wages - with a backdrop of rampant deflation - shrank 5.6 percent in the year to July as company bonuses were brutally slashed.
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It is no less fallacious to consider inflation as a method of raising loans for public use. Technically, inflation does increase the total of the government's indebtedness to the banks. But the banks' intervention is only instrumental. If the government borrows from the banks, the banks do not grant loans out of their own funds, or out of money deposited with them by the public; the banks are not real lenders; they grant the loans out of their "excess reserves." They merely expand credit for the benefit of the government. In other words, they increase the quantity of money substitutes.
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There are a number of methods that have been suggested to control inflation. Central banks such as the U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations (that is, using monetary policy). High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied.
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Define inflation as rising prices and, like Jimmy Carter, you’ll think that oil sheiks, credit cards and private businesses are the culprits and price controls are the answer. Define inflation in the classic fashion as an increase in the supply of money, with rising prices as a consequence, and you then have to ask the revealing question, "Who increases the money supply?" Only one entity can do that legally; all others are called "counterfeiters" and go to jail.
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