Understanding Inflation

One of the biggest objections people like Peter Schiff have raised against the proposed rejuvenation plans is that it will cause hyperinflation. What exactly is inflation and what are the dangers that the U.S govt actions are going to have for the world?

Wikipedia describes inflation as follows:

"In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. The term "inflation" once referred to increases in the money supply (monetary inflation); however, economic debates about the relationship between money supply and price levels have led to its primary use today in describing price inflation. Inflation can also be described as a decline in the real value of money—a loss of purchasing power in the medium of exchange which is also the monetary unit of account. When the general price level rises, each unit of currency buys fewer goods and services. A chief measure of price inflation is the inflation rate, which is the percentage change in a price index over time."

"The Austrian School maintains that inflation is always and everywhere simply an increase of the money supply (i.e. units of currency or means of exchange), which in turn leads to a higher nominal price level, as the real value of each monetary unit is eroded, loses purchasing power and thus buys fewer assets and goods and services.

Given that all major economies currently have a central bank supporting the private banking system, almost all new money is supplied into the economy by way of bank-created credit (or debt). Austrian economists believe that this bank-created credit growth (which forms the bulk of the money supply) sets off and creates volatile business cycles ) and maintain that this "wave-like" or "boomerang" effect on economic activity is one of the most damaging effects of monetary inflation."

"Inflation is one of the three means by which it can fund its activities, the other two being taxing and borrowing. Therefore, the actual cause of inflation is government's need to create new money. The money created then goes to fund various government programs, for instance welfare and warfare.^"

This is perhaps the most important thing to realise here - inflation is the means by which government gives itself money to do the things that the politicians in power want to do(good or bad, depending on the politician). It hence gives the government a means to interfere in the market and literally create money out of thin air and put it to use, not as per any productive aims, but in a manner as to maximise "public good".