Is the cause of inflation that the money supply is greater than actual demand?
If a country issues more currency, where do these currencies go?
Money wasn't given for free, so why does the money in the hands of ordinary people depreciate?
Here I have familiarized myself and interpreted it with simple and easy-to-understand examples.
As a player in the cryptocurrency space, it is essential to understand the principles of inflation, as they directly affect the necessary conditions for interest rate cuts!



The currency issuance should equal the total market value divided by the circulation frequency.
Suppose a country has only three people: A grows rice, B grows wheat, and C raises pigs.
A spends two dollars to buy noodles from B.
B takes the two dollars earned from A to buy pork from C.
C then takes the two dollars earned from B to buy rice from A.
So the total market price is six dollars, but it circulated three times, so in fact only two dollars need to be printed; printing more would trigger inflation.

The whole society is similar; in a country, there are bicycle manufacturers, car manufacturers, rice growers, salespeople, flour producers, lumberjacks, miners, missile manufacturers, financial services providers, and educational institutions. Calculate the total value of these goods and then determine how many times they will circulate; that's the currency issuance... Simply put, that's how it works.

So in this process, any problem in any link could lead to inflation.

Inflation is a neutral term; it is neither good nor bad. Inflation may lead to economic growth or economic decline.

It needs to be corrected that inflation is simply a rise in prices, not because the demand for money is less than the supply of money (refer to the sixth point below, where there is no phenomenon of excessive money supply, yet inflation still exists). So it seems many people have misconceptions; in fact, the meaning of inflation is very simple: it is a rise in prices.

Many people think inflation is very complicated, like excessive money issuance and supply-demand issues; in fact, it is not:

Inflation = continuous rise in prices.

Correspondingly, deflation = continuous fall in prices.

I will explain this through examples.
Once upon a time, there was a country where goods and currency were roughly balanced, and prices were relatively stable.

01,
One day, another country invaded this country, destroying its farmland and industrial facilities, resulting in reduced production output; many goods that were originally available in society could no longer be produced.

The example is the Republic of China in 1945.

This is called supply-reduction inflation, where total output decreases, leading to a situation where the money supply exceeds demand, triggering inflation. In this case, the supply curve shifts down, supply decreases, and GDP falls.

02,
Later, this country experienced a civil war; the government needed to spend money on the war and purchase supplies. With insufficient funds, they printed money to purchase military supplies and pay soldiers, leading to a massive increase in the money supply, which far exceeded demand, triggering inflation.

The example is the Republic of China in 1948.

This is called malicious excessive money issuance inflation. Generally, this type of inflation is hyperinflation (prices soar uncontrollably until economic collapse). Total demand suddenly surges, causing prices to skyrocket, which may also lead to sluggish commodity circulation, ultimately resulting in economic collapse.

03,
Later, this country underwent a change of regime. Society began to stabilize, but for a period, the country canceled commodity trading, creating a lack of a market, hence no inflation either. Although there was no market, money still existed.

At this time, commodities were priced by the state, but the government could not calculate how much was actually needed, so purchasing goods required quotas or ration tickets.

In a planned economy that completely abolishes commodity trading, there is no free market, so naturally, there is no inflation.

04,
Later, this country realized that it could not function without a market, so it restored commodity trading and the market. However, since there had been no free market for a long time, but there was still money, once the market opened, circulation increased.

It was found that there was actually a lot more money than goods, so the prices originally set by the government began to soar due to the demand and supply relationship in the free market and the increase in money circulation.

The example is the early period of reform and opening up in Dongda.

This is called catch-up inflation; due to the rapid marketization of an originally unfree economic system, inflation was caused by increased circulation.

05,
Later, this country gradually got back on track; as it moved towards marketization, the market began to flow smoothly, and the circulation of money began to increase. Since the frequency of circulation increased, the total amount of money was no longer needed as much, but the money in the market could not be withdrawn in a short time, hence triggering inflation.

The example is Dongda during the process of marketization.

This is still called catch-up inflation; due to marketization, the market began to flow smoothly, and the increase in money circulation led to a decrease in money demand.

06,
This country experienced rapid development, producing a large volume of goods, but the demand increased too quickly. Even if prices rose, demand would not decrease, leading to a continuous rise in overall prices in society.

Then the government needed to print money to adapt to price increases. Rising prices would trigger inflation.

The example is Dongda during rapid development.

This is called demand-pull inflation, due to a seller's market causing prices to rise. In this case, the demand curve shifts upward; if the demand curve is not vertical, it may lead to economic growth. This is a fundamental reason for China's persistent inflation.

This example can also illustrate that
inflation is not what many people think of as 'money supply greater than money demand.' In this example, there is no phenomenon of money supply being greater than money demand.

Inflation is completely equivalent to a rise in prices.

The following examples 7, 13, 14, and 15 also do not exhibit a phenomenon of money supply being greater than money demand; they are purely price increases, yet they are still inflation.

A money supply greater than demand can trigger inflation; it is a sufficient condition for inflation, but inflation does not necessarily arise from money supply and demand; other factors can also lead to inflation.

07,
Later, the currency of this country suddenly depreciated sharply against foreign currencies, causing the price of imported goods to rise and also triggering increases in domestic commodity costs, leading to soaring prices, forcing the government to print money along with the rising prices.

The example is Dongda in the mid to late 1980s.

This is called exchange rate inflation, where price increases are triggered by changes in exchange rates affecting international trade costs.

08,
This country had a very good economy, so many foreigners came to invest, exchanging a lot of foreign currency for RMB, leading to a large inflow of foreign capital, increasing the money supply, and ultimately driving up prices.

The example is the hot money in Dongda.

This is also exchange rate inflation caused by foreign capital inflow leading to domestic price increases.

09,
Later, this country began to open up and gradually engaged in international trade. This country largely depended on exports, so some goods that were originally for domestic consumption began to be sold abroad, resulting in a reduction of domestic goods, leading to a decrease in total domestic money demand, triggering inflation and rising prices.

Moreover, since the goods were sold abroad, the foreign currency earned could not be consumed domestically and had to be exchanged for domestic currency with the central bank. Therefore, the government had to print corresponding domestic money based on the income from foreign currencies, resulting in excessive domestic money supply.

The example is Dongda since the reform and opening up.

This is called export inflation, caused by the export of goods leading to a reduction in domestic goods and excessive issuance of currency due to foreign exchange settlement. This is a major reason for the longstanding high inflation in our country.

10,
Later, the internet began to spread in this country, making the market more fluid and increasing the frequency of money circulation, thus decreasing money demand and triggering inflation.
Undoubtedly, this also belongs to catch-up inflation.

11,
Later, the 2008 financial crisis occurred. The government implemented a 4 trillion yuan economic stimulus policy to maintain high growth, issuing a large amount of government bonds and causing excessive money supply.

The example is the economic stimulus policy of 2008.

This is called fiscal inflation, caused by government spending increases and excessive issuance of government bonds, which leads to an increase in the money supply.

Due to the special nature of the system, officials are assessed solely on GDP, so local governments, in order to promote local GDP growth, also disregard local fiscal strength, issuing a large amount of local debt and deficit spending, which has also caused excessive money supply, triggering inflation.

The example is the economic stimulus policy of 2008.
This is called fiscal inflation, due to government spending increases and excessive issuance of government bonds, leading to an increase in the money supply.

Due to the special nature of the system, officials are assessed solely on GDP, so local governments, in order to promote local GDP growth, also disregard local fiscal strength, issuing a large amount of local debt and deficit spending, which has also caused excessive money supply, triggering inflation.

The example is local debts across the country.

This is also fiscal inflation, where local governments expand spending and issue a large amount of local debt, leading to an increase in the money supply.

12,
Later, real estate in this country became very prosperous, with housing prices skyrocketing. The people were enthusiastic about buying houses, but incomes were limited, so everyone began to borrow.

The government also introduced lending measures to promote real estate development, such as low down payments and loans for first-time homebuyers, leading to a significant increase in money supply and pushing up social prices.

The example is Dongda after 2008.

This is called credit inflation, generally referred to as credit expansion. It is caused by excessive lending by financial institutions, leading to an increase in the money supply and a rise in prices. If credit expansion is too severe, it can easily trigger a subprime mortgage crisis.

13,
Due to some abnormal reasons, supply costs increase rapidly, such as a sudden rise in production material prices, leading to an increase in domestic commodity prices, thus causing price rises. China's land finance, where land prices are continuously increasing, leads to higher housing prices and ultimately drives up overall social prices.

The example is also Dongda after 2008.

An international example would be the oil crisis of 1973.

This is called cost-push inflation, where price increases are caused by rising resource costs.

14,
Due to very low productivity in basic industries and excessively high production costs, the cost of upstream industries increases as the costs of low-end industries rise, such as food and clothing. Increased costs will lead to higher wages in upstream industries, ultimately resulting in an overall rise in social prices, causing inflation.

Many underdeveloped African countries fall into this category, as low-end industries, such as light manufacturing, have excessively high costs (despite being poor, basic daily necessities in Africa are surprisingly expensive), leading to price increases.

This is called structural inflation, caused by uneven industrial development. High inflation in underdeveloped African countries is largely due to this reason.

15,
The country ultimately relies excessively on foreign production for consumer goods, and due to inflation in other countries, the cost of imports rises (this is different from exchange rate inflation, as it is an increase in foreign prices), leading to higher import costs and ultimately increasing domestic prices.

As for an example, I can't think of one right now; if anyone can suggest one, please let me know.

This is called imported inflation, where inflation in other countries leads to inflation in the domestic country due to reliance on imports.

A country on a normal track, due to economic development, a prosperous market, normal bank lending, appropriate foreign exchange income, and reasonable deficits, can consider an annual inflation of 2% to be reasonable. Countries undergoing rapid development may have slightly higher rates, but exceeding 10% indicates a problem.

If inflation is too high or too low, or even negative inflation (deflation), the reasons need to be investigated. Both excessively high and low inflation are detrimental to the economy.

That's about all I can think of. If categorized by type:
It can be divided into
Demand-pull inflation.
The aforementioned catch-up inflation.

Supply-push inflation:
The aforementioned supply-reduction inflation, export inflation, structural inflation, and imported inflation.

Monetary inflation:
The aforementioned malicious excessive money issuance, exchange rate inflation, credit inflation, and fiscal inflation.

Inflation may lead to economic decline or economic growth.
Economic growth such as export inflation.
Economic decline, such as supply-reduction inflation, or 'stagflation,' where the supply curve shifts up but results in price increases driven by costs.

Thus, real GDP will decline; to determine whether an upward shift in the supply curve leads to economic growth, one needs to look at real GDP, i.e., whether inflation is rising faster than nominal GDP growth (GDP deflator or PCEPI).

The same type of inflation can have two different outcomes; for example, China's catch-up inflation is beneficial for the economy, while the catch-up inflation after the collapse of the Soviet Union had severe consequences. Once inflation affects normal market circulation, it becomes almost uncontrollable, worsening until the economy collapses.

Monetary inflation, generally aimed at appropriately stimulating the economy or maintaining stable inflation through excessive money issuance, is beneficial for the economy; otherwise, it can lead to hyperinflation, severely destroying the economy (for example, in the late Republic of China or Zimbabwe).
The increase in the money supply can come from bank lending or government issuance; ultimately, it will flow into market circulation.