What Causes Inflation?

What causes the prices to go up and real value to go down? To understand what causes inflation, visualize using only one economic variable – LAND; because ALL material things we buy or use originate from the land.

The land may change form, but the wooden floor you stand on (trees), the fork you hold (metals), the road you drive on (asphalt, derived from oil), the T-shirt you wear (cotton plant), the boat you sail (fiberglass, from sand or silica), and the food you eat are all originally derived from the land.

And the cost of this single economic variable, land, is RENT. Because Mother Nature isn’t making any more land (supply is limited), all land use is valued preciously through its cost of rent.

Rent dominates our entire economy. For example, the production and distribution of a cotton T-shirt pays costly rent every step of the way. The cotton farmer begins the production process by paying land rent as well as rent for his tractors. Rent is also often disguised in words like “interest” and “price”. The T-shirt manufacturer pays “interest” on his mortgage or business loan, otherwise known as rent on money; and then pays to rent space on a truck to ship it (they are not buying the truck space, so they must be renting it for a period of time).

So the consumer eventually pays for the farmer’s, manufacturer’s, shipper’s, and retailer’s costly rent in the “price” of the T-shirt. Also hidden in the “price” is typically all the office rent for accountants, lawyers, marketing, healthcare and insurance services that may be involved in the process. And the consumer so often uses a credit card, which typically charges “interest” or rent on the money it lends. Finally, the consumer rents their own house to store the T-shirt. 

Labor wages are also derived from land rents, as wages and rents are mirror images of one another. The amount of labor wages we receive are directly proportional to the land rent we pay. For example, NYC has high rents and therefore high labor wages. As the rents rise or fall, so to do the labor wages, which we are clearly seeing today. The same is true in China, India and Mexico, as it is NOT their low labor wages that produce such cheap goods, it is their low land rents. Said differently, if land rents in China were high, labor wages must also be inflated proportionately to pay for them, not the other way around.

So what do land rents have to do with inflation? Everything. As our population grows and/or we desire more ways to use our limited land, the land becomes more precious and our rents rise, causing inflation. In other words, as we demand more and more things from our limited supply of land, land rents go up and up, which in turn inflate prices of everything, resulting in a decline in the real value of things.

So what causes inflation? Rising land rents.

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