What is inflation ?
Inflation is a measure of the general increase in prices and decrease in purchasing power over time. It is usually expressed as a percentage rate of change in the general price level of a basket of goods and services over a certain period of time, typically a year. When prices rise, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power of money
Simply said : inflation means that you can buy LESS goods/services with the money you own
What causes inflation ?
There are several reasons for inflation :
1) When the demand for products is higher than the supply of those products
2) When to cost to produce a product rises
3) When more money is created, resulting in more money available to buy the same limited supply of goods/services
How did inflation in US change over time ?
There has been a strong increase in the inflation in the US over the last 3 years, with the current yearly inflation level at about 6,5 % per year.
Financial analysts agree that the most important reason for the current high inflation is the increase in money supply, thus not an increased demand or increased production costs.
How did the US money supply grow over time ?
Last couple of years the US money supply (M1 = bank notes + coins) increased from about 10 Trillion USD to 40 Trillion USD in less than 3 years.
This was caused by the US Federal government that "printed" extra dollars, and brought those extra dollars in circulation to cover their expenses.
When the government multiplies by 4 the available money, and the supply of goods and services grows remains identical, it is clear you will have to pay a lot more when buying those goods and services. So the purchasing power of your savings reduces because the government increases the money supply
But do not only blame the government, also YOU increase the money supply and cause inflation ...
Yes, YOU are also responsable for increasing the money supply and as such increase inflations & reduce the purchasig power of your savings...
How ? You keep most/part of your financial reserve in a bank account ? Then you have to know that the bank will use your deposits to increase the total money supply via the technique "fractional reserve banking"
Fractional reserve banking is a system in which banks hold only a portion of their deposit liabilities as reserves and can lend out the remaining amount. This means that banks can create new money by lending out more than they hold in reserves, which leads to an increase in the money supply. The fractional reserve requirement is set by the central bank and governs the minimum amount of reserves that a bank must hold.
The fractional reserve requirement in the United States is set by the Federal Reserve (the central bank). Currently, the reserve requirement for most banks is only 10% of the received deposits.
This means that a bank must hold 10% of its deposit liabilities in reserve, and can lend out the remaining 90%.
Example :
A US employee receives a monthly salary of 5000 USD that is paid into his bank account.
That 5000 USD is part of the total monetary supply created by the US government
The bank only has to keep 10 % of this amount (so 500 USD) in their reserves, and can give the other 90 % of your money as a loan to person-X.
What is the impact on the money supply ? You still "own" 5000 USD that you can spend to buy goods and services. But person-X now also owns 4500 USD he can spend to buy goods and services. So by simply depositing your salary in the bank, you increased the money supply form the initial 5000 to 9500 (5000+4500) USD via the fractional reserve banking technique applied by the bank.
Result : because there is an increased money supplied compared to an identical quantity of goods and services, the price to buy those goods and services will increase. So by putting your money into a bank account YOU also contribute to an increase of inflation = less purchasing power for you ...
Solution ? Do not put the money in your bank account, but invest it in crypto (stable coins or other crypto) that you store in a self custody software wallet (such as Trustwallet, Klever, Metamask, ... ) or in an hardware wallet (Ledger, ...). Nobody can abuse your crypto in YOUR wallet to increase the money supply and create inflation.
Note about storing crypto at exchanges instead of in a self custody wallet : some crypto exchanges are unfair and do not store their customer deposits 1-on-1. You can say that those bad actors also apply some form of "fractional reserve banking" (we have seen this eg with FTX exchange). Those unfair crypto actors are a minority, but they exist... So a self custody wallet is MUCH safer than storing your crypto on an exchange ...
