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Inflation

Excess-demand inflation is a point where there is a higher demand than normal for a particular product or service without an accompanying increase in production capacity, in the case of the former, or labor, in the latter.

During most wars, the government puts increased demand for products on the marketplace. Army boots compete with civilian shoes for raw materials and labor. Housing materials, such as plywood and Oriented Strand Board (OSB) for rebuilding efforts compete with private home owners and businessmen attempting to build domestically. Fuel oil and gasoline to run tanks, Army Humvees, airplanes and ships compete with civilian automobiles, trucks and trains.

When governments place excessive demands on production, usually for war efforts, they generally do so by borrowing artificially created fiat money to pay for their materials and labor. When that occurs, a paradox develops wherein prices inflate (due to excess money and demand on the part of the government) while at the same time, the consumers are unable to pay the rising prices. At the end of the day, the consumers will not only pay the government’s bill through their taxes, but also the interest on the borrowed fiat money to begin with. This condition is sometimes called “stagflation” where prices inflate, while consumer spending decreases to depression levels.

Another way an economic system may experience inflation without necessarily seeing a rise in money circulation, is through the transference of money between economic spheres.

An economic sphere is a system that contains a nucleus industry surrounded by all of the accompanying support industries that associate with it. Without an increase in the money supply, excess demand on one economic sphere will cause money to flow from a sphere of lesser demand to one of more.

For example, the Oil Industry is one economic sphere; hospitals, insurance companies, clothing manufacturers and entertainment are examples of others. When demand increases on oil, without a rise in production, the price will rise. The money to pay the higher price will either come from inflating the amount of money in circulation, such as is done when credit cards are used, or by drawing money from another sphere, such as entertainment or clothing, to pay the higher price.

Hospital prices, insurance rates, oil and gasoline are generally the most likely spheres to inflate prices, due to ever-increasing demand for those products and services. Hospitals benefit from government mandates that coerce people to pay a Medicare/Medicaid tax that is used to drive prices up in healthcare; auto insurance companies benefit from government mandates for all drivers to have auto insurance. Since these mandates are enforced by the government’s monopoly of power, those services will always be in demand as the consumer is forced to shift finances from another sphere - clothing, food, entertainment, etc. - to the spheres that are mandated. This coerced demand, along with the money to fund it being taken from elsewhere will always lead to inflation of prices within the dominant spheres. Oil and gasoline then become demand items as consumers are required to travel to and from work in order to pay their mandated obligations. One sphere’s high prices then supports another’s.

In the event credit is used to pay the dominant sphere, consumers will drive prices up artificially by purchasing that which is mandated, and continuing to purchase the other products and services they are accustomed to, causing all prices to rise as new money is rushed into circulation

In the event cash from the currently circulating stock of money is used, the dominant spheres (hospital rates, auto insurance, gasoline) will inflate in price while the secondary spheres (clothing, food, entertainment, etc.) will concomitantly drop their prices as consumers shift money away from them.

This creates a paradoxical situation for the economic observer. At once, prices of some products are priced beyond the ability of most to pay, while other prices have dropped to a fraction of their original value - with no money available to purchase them.