By Antonius J. Patrick, Contributor

What is inflation? It is not what most, including those in the financial press, media, and academia, typically believe which has made it easier for the perpetrators of this evil to continue in their ruinous policy.

Inflation is commonly perceived as a rise in prices caused in the modern era by an increase in energy prices, especially that of oil. This belief is fallacious even though 99% of the economics profession including most Nobel laureates consider it to be so.

Accurately defined: inflation is an increase in the supply of money; price increases are its consequence. Thus, the rise in overall prices are the /effect/ of an expansionary monetary policy. Once this is understood, steps can be taken to combat it.

Since inflation is an increase in the money supply, attention should be directed at its source. In the U.S., the Federal Reserve has sole control (“monopoly power”) of the amount of dollars that are to be created. America is not unique in this monetary arrangement, every nation’s economy is subject to a central bank.

Yet, the Fed, the financial press, and academia all like to point to other factors for rising prices: speculators, greedy oil companies, foreign countries especially Arab states. However, their most effective ruse to deflect blame from the Fed is to label “inflation” as a rise in prices instead of an increase in the money supply which confuses cause and effect.

Ever since the financial crisis began, the Fed has pumped a staggering amount of dollars into the U.S. economy and, for that matter, across the globe calling it the misleading and nonsensical term “Quantitative Easing” (QE). John Williams of /Shadow Stats/ has estimated that the monetary base (M3) has increased by about 4% this year.

Counter to what is believed throughout the financial world, increasing the money supply will have absolutely no effect on economic growth, in fact, in the long run it reduces growth and can lead to the dreaded business cycle. If printing money could bring about prosperity, all a poor country would have to do is print money and become rich.

At one time, nearly everyone understood that printing money to achieve growth was economic sophistry and those who espoused such nonsense were considered quacks! Now they are distinguished, tenured university professors and even heads of central banks!

Besides a rise in prices, inflation redistributes wealth as those who receive the “new money” first get to spend it before prices go up while those who receive it later pay higher prices.This surreptitious transfer of wealth has accelerated since the start of the financial crisis.

In the Fed’s case, the new money is being printed to protect and shore up the major U.S. banks and financial houses who are basically insolvent (“zombies”) and would collapse if not for the Fed’s constant interjection of “monetary stimulus.” As the money filters through the banking system and into the economy, prices rise as the purchasing power  of each dollar in “circulation” is diluted. The law of supply and demand holds for money as with any other good.

The Fed’s inflationary policy cannot be maintained in perpetuity. Ultimately, severe price inflation will result and eventually a collapse of the dollar and the breakdown of the U.S. economy will occur.

The remedy for rising prices, therefore, is quite simple: stop increasing the money supply. This is more easily said than done where money can be created almost costlessly via the printing press or electronically with the stroke of a computer key. The only guaranteed assurance of a non-inflationary monetary policy and its resultant increase in prices is a return to a commodity monetary standard of gold and silver.

Prior to the re-establishment of a monetary system based on real money — gold — there must be a general understanding of what inflation is and what its effects are. Once this is known, the Western world’s
financial crisis can begin to be resolved.