What is Inflation?

When Marco Polo visited China hundreds of years ago he saw an endless list of wonders that did not exist in the West, and among them, the so-called "paper money". The currency was not backed by valuable metal, being fiat, just like modern coins. Of course he, as a mere visitor, was not able to see the negative consequences of the use of fiat currency, among them, inflation (a problem similar to that caused by the Roman Empire by reducing the amount of silver in coins to leave the payment of the Empire's debts with some slack). But what is inflation?

Imagine the following situation: you are on an isolated island where the currency used by the natives is turtle teeth. There is a limit to the number of turtle teeth that are found per year, and the creation of products that people want follows more or less the same volume, that is, if a fish is worth a turtle tooth, tomorrow it will continue to be worth a tooth. . But then you find a "turtle graveyard", get more turtle teeth than everyone else on the island, and start buying a bunch of stuff. In a short time, the fish will rise in value, because, as it has more teeth on the market, its value has decreased (law of supply and demand). This tortoise-tooth devaluation is the inflation that happens to our currency and all other fiat currencies.

Of course, there are measures that enable or hinder the existence and volume of existing inflation. After World War II, for example, there was the Bretton Woods agreement, which was a series of agreements between 45 countries, including the USA. Among some of the measures taken were the stabilization of the dollar as the world currency (and the currencies of the other 44 signatories using it as a measure of value), and the dollar being backed in gold (which would allow the bearer of the dollar to exchange his money for the equivalent This measure prevented governments from abusing the so-called "Cantillon Effect", where the government produces more currency than it needs, and since it has it before its devaluation, it manages to pay its bills before that money arrives. in the hands of the people.

However, the Bretton Woods agreement was abandoned by the USA in the 70s, where the country decoupled the price of gold from its currency. Despite becoming vulnerable to inflation, the USA managed to keep the dollar price reasonably stable thanks to the so-called "petrodollar", which was the determination to use the dollar internationally to price oil, and, as there was a lot of demand for oil (and , consequently, per dollar), the price was maintained even with the increase in supply.

Meanwhile, in Brazil, we had periods of hyperinflation, when the government artificially injected money into the economy, both to balance its accounts and to stimulate economic development. With the increase in supply in the face of the same demand, Brazilian currencies devalued.