Global Markets and Inflation: Question and Answer

Outside the United States, countries are dealing with rising commodity prices. Food, gasoline, clothing are among the commodities that people around the world are paying more for. What is the major cause of this?

Now I don’t have a degree in economics but a degree in economics isn’t necessary to understand why this is happening. What is happening is rather simple to understand. Check out the Question and Answer dialogue below.

Q: When we get import stuff from other countries, where are we getting the money? A: We (the U.S.) is printing it.
Q Why are we printing it? A: The Federal Reserve tells the American public that the money printing is needed to stimulate the economy.
Q: Does the United States import or export most of the products that their consumers use? A: We (the U.S.) import the majority of our physical goods (this excludes imports/exports of services or intellectual property). We import physical goods from countries like China. So China, one of the U.S.’s largest exporters, sells (or exports) their products to us in exchange for our printed money.
Q: What does China do with our printed money? A: China converts our currency to their own currency so they can utilize it. They do this by printing it.
Q: What effect does this have on China? A: China is expanding their money supply.
Q: Therefore what is causing China to expand their money supply? A: By selling us (the U.S.) their products. You can say the U.S. exports inflation to China in exchange for China’s goods.
Q: What happens when a money supply is expanded? A: The value of the currency loses value, since there is more of the currency in circulation. The people holding the currency therefore lose purchasing power. The people holding the currency have to have more currency in order to purchase the same products.

Next time I'll dispell some myths the media has created regarding the causes of the global "inflation crisis" discussed in today's blog.