The story of Money; what causes Inflation.

[Rational Head]

Let me demonstrate you what caused the price increase of Rice:
I just got a historical (12 Feb. 2006) price of rice per ton in India( http://www.thehindubusinessline.com/...1300400700.htm )
$236 per ton
Gold price on (12 Feb. 2006)
http://www.kitco.com/scripts/hist_ch...ily_graphs.cgi
$550 per ounce
So price of a ton rice in 2006 in terms of gold (because you cannot mess up with the value of gold be printing more gold)
0.429 ounce of gold will buy one ton of Rice
Current price of Rice in India (28 march 2008)
$1,000 per ton
Current Gold price (28th March 2008)
$950 per ounce
So price of a ton rice in 2008 in terms of gold:
1.0526 ounce of gold will buy one ton or Rice.
Now in terms of dollars, the price of rice has jumped $1000/$236=4.23 times
And in terms of Gold the price of rice has jumped only 1.0526/0.429=2.45 times
Now the jump you see in terms of GOLD, is the actual supply-demand jump. The demand of rice has jumped 2.45 times more than supply of rice compared to what it been back in 2006.
But, the jump you see in terms of dollars, it means that in addition to demand of rice going up, the money supply of dollars is that much more in the market(simple way of finding out is to take the ratio of gold price now by gold price in 2006 i.e. $950/$450=2.11 times).
That means the American government (and any counterfeiters, basically everyone who can create more dollars), have printed and pushed 2.11 time more money into the Market than it was in 2006. Why? Because American government is spending trillions of dollars in Iraq war, they need that money so they printed more money and spent it.
Now this still doesn't explain why there is a 2.45 times surge in demand-supply ratio, its not that unluckily people just started to consume more, well the point is there are three stages of inflation:
1) At first when price rises people think "Well this is weird, the price of this product has gone too high, but there might be some emergency, I will buy when the prices come down", a housewife who needs a frying pan at this stage thinks the same and postpones her purchase of Frying pan for a later date when the prices drop.
2) Sooner or later, the people, and our housewife in the above example realizes that the Government plans to keep on inflating the money supply, and therefore the prices are going to rise more and more. Then she reasons: "I do not need a new frying pan today; I shall only need one next year. But I had better buy it now because next year the price will be much higher." If more and more people think like that then everyone rushes to buy more and more stuff. People buy more and more rice to store for future when the prices will be even higher. The demand of Money falls down considerably and demand of products rises up even more. At this point the government is called to "relieve the money shortage".
3) Soon the country reaches to a stage of "crack-up boom" where people say: "I must buy anything now--anything to get rid of money which depreciates on my hands." The supply of money skyrockets (like last week Bush administration with a Joint opposition effort decided to mail everyone a check of $600), the demand plummets and price rise astronomically. Production falls sharply, as people spend more and more of their time finding ways to get rid of their money. The monetary system has, in effect, broken down completely, and the economy reverts to other moneys, if they are attainable--other metal, foreign currencies if this is one-country inflation, or even a return to barter conditions. The monetary system has broken down under the impact of inflation. This stage is also called Hyper-inflation.
As you can see we are right now in second stage of inflation, people bought more rice than they need because they were afraid that the price of Rice is going to rise even further. The market wasn't REALLY having a demand of rice, but the government distorted market's signals and people thought the market is running out of rice so they ran to buy more rice, and now the market is Actually running out of rice.
How Federal Reserve of United States inflating the dollar is is related to Inflation in India?
Well here is the thing, contrary to what many people believe Indian Rupees is not tied to Gold, it’s actually tied (like most of the currencies in the world) to Dollar. The price of Indian Rupee in International Market is determined by the American dollars, Indian government has that is the issuer of Indian Rupees.
If you guys remember a few months ago we saw Indian Rupees rising against the Dollar (thus proving my point that Dollar caused the inflation) because American government created more dollars, and spent a lot of them in International Market, so when India got it (India and China are the two biggest direct receivers of American Dollars), Indian Rupee rose, but soon when everyone got enough American dollars, the price of commodities in International Market in terms of dollars rose crazily.
What is the solution?
A 100% gold backed Indian Rupee. How can we even think of having our currencies tied to another country's currency, so when they are fighting a war, we end up paying for it by going hungry. Some people now suggest that we should tie it to Euro now, which is again same stupidity, contrary to what you may believe George W Bush can be more trusted with Dollars then Europeans with Euro.
According to the World Gold Council, privately held gold in India is worth US$920 billion , which is four times the amount held in Fort Knox(where all the Gold of US is kept) and about 1/5th of all gold ever mined in the world. That simply means if in future people lose their faith in fiat currency and everyone shifted to Gold standard, Indian public will be world's richest society in the world(because American dollars will be worthless).
Anyone who really understands the value of gold in today's economy, had they invested all their Rupee/Dollar deposit in Gold (around 12th Feb 2006), by now would have been in much less of a trouble because of inflation. Anytime a war starts government prints a lot of money, any time a poverty eradication program (like the latest Debt elimination program by Indian Finance Minister where Rs 60,000 Crore will be created out of thin air), just buy more and more gold.
Check out many digital gold currencies:
http://en.wikipedia.org/wiki/Digital_gold_currency
Also check this service where you can open a free gold currency account and they will do the buying and storing of the gold for you (for a service fees)
http://www.goldmoney.com/
I do not take any guarantee for their services, for guarantee check this page:
http://www.goldmoney.com/en/guarantee.html

Originally posted at:: http://designinglifenhappenings.blogspot.com/