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What Causes Inflation

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What causes inflation?
The common answer people get seems to be very sophisticated and complex. From a simple google search inflation can be caused by many things but the main theme seems to be an increase in prices.

My goal is to make the complex easy and clear. Increasing prices is the effect of inflation, not the cause. Think of it this way:

Let’s say Canada deposited $1 billion dollars into every person’s chequing account. The first thing that happens is a mile long lineup at the Ferrari dealer. But will the Ferrari dealer sell the car for $1 million now? Not a chance. The currency value has been destroyed overnight by printing it too much.

I know this was an extreme example, but I had to “drive home” the point. It is not the Ferrari getting more expensive that caused the inflation, it is the act of printing.

Printing (Inflation) is like alcoholism. When you start drinking or printing too much money, the good effects come first. The bad effects only come later. That’s why in both cases there is a strong temptation to over do it. When it comes to the cure, it is the other way around. When you stop drinking, or when you stop printing money, the bad effects come first, and the good effects only come later.

To get elected, politicians write cheques the country can’t cash. It is easy to give it away and to make ends meet, just create (print) the money needed. This only works for a while, and then you start seeing prices increasing. We are all seeing that now.

So, are the prices going to go back down? Will inflation slow to 2% again? To answer that question, ask yourself “is Canada stopping printing too much?”

To make sure you are protected as well as possible through this increasingly troubling time, contact our office for a look at what direction we provide.

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