In my three-part series on Bubbles, I focused on the creation and destruction of speculative bubbles and government’s response to their aftermath.  In my Wizard of Oz article, I noted that deflation fighting efforts will be inadequate. The incipient component necessary for the development of modern bubbles and the subsequent deflation fighting effort is something called inflation. 

What exactly is inflation? Mention inflation to someone and the likely response is something akin to “prices rising”, or “things cost more”, or “my dollar doesn’t go as far” or to quote Yogi Berra, “a nickel ain’t worth a dime anymore.” While the comments are valid, they are based more on the effects of inflation rather than their true source or definition. The view of inflation is largely pejorative until the public considers the effects of inflation on their salaries or their assets. In these cases, having a fatter paycheck, or witnessing home values increasing or the value of a collectible increasing creates an entirely different feeling. 

Before discussing inflation, let’s first understand the terms money and wealth. What is money? Isn’t it what you have in your wallet? What about what you have in the bank in a checking or savings account? Do we consider a 401(k) account money? Is any of this wealth? Is the equity in my home money or wealth? 

Webster’s dictionary from 1968 says this about money,

Standard pieces of gold, silver, copper, nickel etc. stamped by government authority and used as a medium of exchange and a measure of value.  

The current, online Webster’s dictionary describes money this way,

Something generally accepted as a medium of exchange, a measure of value, or a means of payment.

Notice how the Webster definition changed? 

What is wealth?  Is it something you possess?  The 1968 Webster’s publication suggests wealth is “much money or property.”  Adam Smith in his work, The Wealth of Nations, said that wealth was “the annual produce of the land and labour of the society.”