The True Cause of Inflation

The True Cause of Inflation


In the midst of these cruel economic times for Nigerians, it’s important to challenge the prevailing wisdom of those who claim that the economy needs to be reinflated.

This prevailing wisdom also dominates most of Western economic thought, but it is based upon two lies.

Current reports put Nigerian inflation at 18.3%, andWestern economists think that’s way too high for an inflation rate to be.

Prevailing wisdom states that inflation should be low, around 1-2%, for an economy to function optimally. But even that is a lie.

The lie is the idea that inflation drives an economy. It does not. It merely steals from the people in order to create the appearance of growth.

All that inflation does is to drive an economy into the ground, whether in the short run or in the long run. The rate of inflation merely determines the rate at which the economy is driven into the ground.

We have exposed the first lie.

The second lie is that inflation is beyond the government’s control. In truth, it’s the government … or more accurately the Nigerian Central Bank (which is controlled by the government) that causes inflation.

Inflation is literally caused by monetary expansion. Increase the money supply, and over time inflation will result. The time involved will vary, often dramatically, sometimes even measured in years or decades, but the effect will always inevitably occur at some point in time.

In some cases, such inflation gets “hidden” by economic expansion. This is why inflation rates can appear to be low compared to the rate of monetary expansion.

But when the economy doesn’t grow, or even worse when it shrinks, the monetary expansion actually creates a whiplash effect. It’s even possible in such instances for inflation to rise faster than the monetary expansion that is currently taking place.

Yes, at its root, monetary expansion causes all inflation, even though it’s often hard for average people to notice the connection between the two.

So when “Experts clash over FG’s revenue drive”, you can be sure that what they’re really saying is that they clash over who should have the greatest access and control over pools of money and over the rate of monetary expansion.

While it is heartwarming to see the interest that people like Bill Gates have taken in helping Nigeria, it’s hard to watch the distortion of economic facts used to justify their involvement.

Inflation has grown so high because the central bank has engineered it that way (even if they didn’t intend to do so).

The government for years depended upon the sale of oil to finance massive government assistance (at the expense of true economic development).

You can get away with that for a long time as long as the revenue stream does not reduce or dry up.

When the price of oil dropped, so did the government’s primary source of revenue. The revenue stream reduced.

So the central bank engineered the growth of the money supply.

Why did the central bank engineer it? To finance government aid programs.

Why does the government now want to expand aid programs? To counteract the damage caused by the central bank’s monetary expansion.

It’s a vicious circle, and until it gets addressed head-on by the “experts” in the government, nothing will improve in Nigeria’s economy.