In layman's terms, what causes inflation? Does all currency eventually end up worthless?

Answer 1

Well how philosophical do you want to get? In the long run it's unlikely than any country will last forever, therefore no single currency will last forever, and so all will become worthless as currency (though not worthless as collectible items).

But mere inflation at *normal* levels will not ever make a currency worthless, though a country might choose to re-value its currency for convenience at some point, and drop a few zeros off it. The smallest single unit of a currency might become effectively worthless, but in that case people could just use larger units, i.e., a penny is close to worthless to most people and some day we'll finally quit using it -- but we'll still use nickels and dollar bills. That can continue forever, just pricing things in more units.

As Meg says, inflation is about the quantity of money -- another way is to say the there becomes too much money chasing too few real goods, so the prices are bid up. New money is created in the banking system through the process of lending money as loans -- as long as banks can continue lending money, new money will be created; and normally it's easier to create money than to create real goods and services, hence the tendency for some inflation.

Modern money systems have a built-in bias towards mild inflation as a result of lending (money-creation) to provide capital for business growth and lending for consumption. I see nothing wrong with that -- there is no law of physics that says money should retain the same level of its unit value forever. (Personally I suspect money is "supposed" to inflate).

It's not a problem if incomes rise faster than prices -- which is usually what happens. And even when not, that's not caused by mild inflation, it's caused by other factors causing workers not to be paid as much as they ideally would be.

Answer 2

Over the long term it is an increase in the money supply relative to the level of economic activity. When the world was on the gold standard economic growth usually out paced the rate of new gold discovery so deflation was more common than inflation, but 500 years ago when Spain increased the supply of Gold from America there was an inflationary period all over Europe. Most economist believe that deflation slows economic growth and so the Fed increases the money supply faster than the GDP growth producing inflation. The US has not had a deflationary period since the 1930's , but they were common before the creation of the Fed in 1913.

Answer 3

Supply and demand: If you have lots of something and people don't want it your not going to get anything for it. If you have a very little bit of something everybody wants you can charge their first borns.

Inflation is caused by (stop for a sec... I mean monetary inflation, the inflation of money, there are other things the inflate) currency not being based on anything and the government printing more and more of it.

The more money the gov't prints the less it is worth. That is inflation.

Furthermore the federal reserve likes to keep inflation going because they don't like deflation. Deflation is what happens when the gov't stops printing ( or slows the printing of) money. Money in this instance becoms worth more and more every day instead of less and less. This causes more people to hold on the their money which slows the general economy down.

Personally I'd like to go back to the gold standard. Our money used to say "PAYABLE UPON DEMAND" now it says "IN GOD WE TRUST". I don't like a faith backed monitary system give me something real!