We will now discuss an extremely important concept to learn about which is called inflation. Inflation is your first enemy on your way to financial freedom!
The basics of inflation are pretty simple, but you will learn that this is a very complex concept in the whole world of investing.
We will take a balloon as our first example. When we blow more air into the balloon, we inflate the balloon, making it bigger. When we than let air out of the balloon, we deflate the balloon, making it smaller.
This is also the case with all fiat currencies such as the Dollar and the Euro. These two major currencies are printed and regulated by the Federal Reserve and the European Central Bank.
When the Federal Reserve decides to print more Dollars, they blow more air into the balloon, and thus making it bigger. The total amount of Dollars in circulation increases, which is called inflation. The result is that the Dollar becomes less valuable. The supply increases and the demand stays the same.
When the Federal Reserve decides to take Dollars out of circulation, they let air out of the balloon, and thus making it smaller. The total amount of Dollars in circulation decreases, which is called deflation. The result is that the Dollar becomes more valuable. The supply decreases and the demand stays the same.
