Inflation certainly exists, there is no doubt about that. And, it exists in much greater intensity and depth than our economic "experts" would like you to believe. And there is absolutely no reason for it, it is totally unnecessary and serves no positive role in our economic lives.
There are theoretically two types of inflation, but at heart there is only one; monetary inflation. This is simply the growth of the amount of money in the economy or the money supply. This is determined by the actions of the Federal Reserve Bank, which controls and monopolizes our monetary policy. If the Chairman and the board decide to increase the money supply and magically add new dollars to the economy, we will experience monetary inflation. It is only a matter of time.
Monetary inflation is too many dollars chasing too few goods. When the amount of dollars in the economy is increased, if a greater amount of products and services aren't correspondingly increased, the excess money will seek out the existing goods and prices will rise to meet the money. Granted, the economy can pick up because of this activity and artificially increased demand, but any sustained boom must be sustained with increasingly larger amounts of new money. Thus, the cycle begins until the economy can no longer afford the inflated costs and the bust begins. We have just experienced the bad end of this type of monetary cycle.
The other type of inflation, price inflation, occurs as a result of monetary inflation. If money was not created out of nothing, it is still possible to experience price inflation, but it would occur in "segments" of the economy, rather than throughout the economy. Supply and demand would also resolve price inflation through competition. Producers tend to flock to areas of the market that have high demand and correspondingly high prices and soon the demand is filled and the price slackens. It is this constant adjustment that is inherent in a "free market".
The less "free" the marketplace is, the less responsive the market factors are to price. A controlled market that we have in the modern world often doesn't react fast enough to alter prices and bring equilibrium. Adjustment must be brought in from the outside through government or otherwise and this further removes the market from its natural functions. It soon becomes hard to discern between "market reactions" and "intervention". At this point, it becomes very difficult to determine the direction the economy will take and people choose to sit on the sidelines, further depressing the market reaction. This entices the government to further action and the whole cycle begins again. The more intervention that occurs, the more that is needed.
If you study government statistics on inflation, you might think we haven't had much inflation at all since the early eighties when it spiked above ten percent. The government is very gaurded and really untruthful about inflation because it is really a hidden tax. The monetary policy is crafted in a way that allows the government to spend as much money as it desires. Quite a bit of the government debt is bought up by the Federal Reserve and government securities are primarily what the Federal Reserve deals with. Without these tools at the Treasuries disposal, government spending would be limited to tax revenue, which is a fraction of the Federal Debt. By creating money out of thin air and issuing countless Treasury Securities, the government is able to spend many times the amount of money that it collects in taxes.
The problem is, all this money creation is a "tax". Each newly printed dollar receives and confiscates its value from the dollars in your savings. Everything the taxpayer must buy to sustain himself goes up in price as a result of this monetary expansion. Add to that, the government activity itself inflates the economy and diverts capital away from where it would naturally go. A greater amount of the tax dollar must service this debt, which simply means we are required to pay the interest on all this debt as we go. With more tax money dedicated to interest, government must raise taxes and issue more debt, which only pressures consumer prices even further. Not to mention, that this debt which is over ten trillion, at some point, is suppose to be paid off.
Because of the enormous size of this debt, our government "wants" inflation! Debt always appears smaller during inflationary times and larger during deflation. As prices rise, money becomes less valuable and debt correspondingly loses its value. The only way for our debt to be paid off, is to forego any sustained deflation. If monetary supply deflation were to take hold to the point where a current dollar is worth three, our national debt would feel as if it were 30 trillion rather than 10. The government would much rather have our current dollar be worth fifty cents due to inflation and the debt loses its value. The problem is, the only way to accomplish this is to increase the debt through thoughtless and lax monetary policy. We must borrow to belittle the enormous debt, which only further grows the debt! You see the problem?
What has been referred to as our recent "economic crisis" is and was pure and simple inflation. When monetary policy is very liberal [much new money is issued at low interest rates], as it was since 9/11, the excess money tends to chase what are known as paper assets. These are primarily stocks and land or land related assets such as buildings, or in this case, houses. This is true because it is much easier for cheap [low interest], created money to latch on to values that already exist rather than values that have to be produced. So, instead of new factories being built to meet natural demand for a product, the values of existing land, stocks and assets swell with the inflow of new money. It is, in a sense, the reverse of the natural economy, where the assets values will increase due to increased production and demand.
From the year 2000 to 2007, many of our "stronger" real estate markets doubled their values. There was no underlying real value created, this was simply the inflow of new and easy funds into an existing market. Something must absorb the increased currency and houses were a good sponge. Stocks also assumed this role, at one point clearing 14,000.
The inflated prices could not be sustained. At some point, it becomes impossible to continue doing business. The numbers just don't work and people begin to realize that. Prices are too high and buyers begin to pull out. When this occurs, and debt has been issued in record amounts to sustain these inflated prices, repercussions are felt throughout the economy. Insolvency, the inability to meet financial obligations, becomes commonplace.
The Federal Reserve's answer is to continue dumping large amounts of "new" money into the economy. Programs and bailouts are initiated, stimulus progams announced. These all serve one purpose; to re inflate the economy and prop up asset values. Much of the money however, is being directed to service debt that was incurred during the inflationary period. Debt locks in old, higher values even though the economy is trying to deflate. The debt must be serviced or excused for firms and individuals to remain solvent.
If we lived in a world of sound money, a world in which the Federal Reserve didn't dictate monetary policy, where money represented real value, and banks weren't allowed to create money through "reserve" banking practices, inflation would barely ever raise its ugly head. Instead, inflation is as prevalent as the weather, it is with us every day. The question isn't whether inflation exists, the question is only one of degree.