Purchasing power of the US$

Hat tip to Zero Hedge for the graph.

This is the graphic representation of the inevitable effect of fiat money and fractional reserve banking.

As pointed out in previous notes, a fiat monetary system allows the instant expansion of the monetary base and credit at virtually no apparent cost. But, as I remark in this note, the cost of a fiat monetary system is merely accumulated in the form of inflation and postponed. However, the longer the cost is shunted down the road, the greater the imbalances it feeds become. The cost of fiat money is evident in the graph below. What this graph also shows is the exponential nature of inflation.

Inflation is inherently and by necessity exponential in nature. That is because as inflation erodes the value of a currency, you require ever more currency in order to obtain the same amount of GDP expansion. That is the reason why a hamburger and soda that used to cost $0.50c in the 1940s now costs $3 for example. That is also the reason why the expansion of credit and the monetary base was progressing in the double digits but GDP progression meandered between 2% and 6% in a good year.

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purchasing power

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