Inflation vs Deflation - What does it really mean?

How many articles have been written over the last year and a half talking about the prospects of inflation or deflation? I'm sure someone can find out, but I doubt I'd be wrong to say thousands... I've read quite a few, and a lot of them have been very technical in nature, which only confuses the majority of readers even more. I'm not an economist or play one on t.v., but from everything I've read and come to understand, here are some differences between inflation and deflation:

•  Inflation simply occurs when the gov't, by way of the Federal Reserve, prints more money than is destroyed in a time period, usually a year. A good example is that if the government produced 5 widgets this year, and there was $100 in the money supply to buy those 5 oranges, then each orange would cost $20. However, if the government decided to print more money, and the next year there were still only 5 widgets, but now there was $200 in the money supply, then each orange would then cost $40. Nothing else changed, except now there was more money available, and the price per widget went up.
• Across-the board prices generally go up because of inflation, not the other way around. The laws of supply and demand obviously have to be taken into account - so I am strictly talking about general, across the board price increases that we see every year.
  
• Deflation occurs when the gov't decreases the money supply, by any number of ways. Using the above example with widgets, if the gov't decreased the money supply from $100 to $50, then those same 5 widgets now cost $10 instead of $20. 
• Across-the board prices generally go down because of deflation, not the other way around.

So, because of what I said above, when we have inflation, the purchasing power of a dollar goes down. There are simply more dollars to go around, so you cannot buy as much with a single dollar. The opposite happens with deflation. The purchasing power of the dollar goes up. Since there are less dollars to go around, you can buy more with a single dollar.

Ok - so we know the general definition of inflation and deflation. What does that mean to the average household? Since the Federal Reserve came into being, the United States has generally experienced an ongoing period of inflation. In fact, since the Fed's inception, the value of the dollar has decreased by 95%! So what can we learn from this period? Generally speaking the banks and financial markets have done well during this time period. Why? Well, when the gov't creates money, the banks get first crack at the new money. You can think of them as the middle-man. The common folk of the country get it last, through loans, paychecks, etc. Whenever you are the last in line, you always get the scraps. In this case, the people/banks/institutions that had the 'new' money before the average joe get rich . Inflation also has hurt the middle class in that since about 1972, people's real wages actually have gone down. Salaries and raises have not kept up with inflation, resulting in a lower 'real wage'. The gotcha is, most people think that they are doing better because they get raises every year. So people have been lulled into a sense that everything is OK.

What would happen if we had deflation? What tends to happen is that the prices of goods drop quicker than salaries, resulting in a higher 'real wage'. That is, peoples salaries aren't dropping as fast as prices, so they have more bang for their buck. The downside of deflation is, sooner or later employees become too expensive and unemployment takes off. This is best seen during the Great Depression in the 1930's. What's interesting about that time period though, is that butter and meat consumption per person actually rose during that time frame, as well as an increase in charitable giving. This increase is precisely because of the increase in the 'real wages' of the worker, and is often overlooked in history books.

In the end, neither inflation or deflation works out well for us citizenry. What works best for the normal folks is to have a stable dollar. However, that doesn't help the financial firms, banks and other 'fat cats'. They can't make the big bucks by having a stable currency - but unfortunately they are the ones in power. Unfortunately, once they got in power, our past generations were not aware enough to kick them out. We need to realize what is going on here and make our government understand that we are in charge, not the financial markets.

My first blog is about complete. I hope I've been helpful in explaining what inflation and deflation really mean. Neither one is necessary - we went for long stretches in this country's history without having either. They are now a result of monetary policy which is not designed to help out the average citizen. President Andrew Jackson saw this very thing when he abolished the central bank in the 1830's. Thomas Jefferson warned of a central bank repeatedly. Maybe now is a good time to remember the old adage... 'Those who do not learn from history are doomed to repeat it'.....

Thanks for reading, and remember it's always ok to ask 'Why?'