We have written quite extensively on the cause of inflation in articles like: How does the Money Supply affect our Inflation Rate? in What is Inflation? and Inflation Cause and Effects. One of the keys to understanding inflation is the Money Multiplier.  Because of the "Fractional Reserve system banks are only required to keep a small fraction of the money on deposit as "reserves" against potential withdrawals the bank can loan out the majority of the money on deposit to earn interest. This results in a multiplication effect increasing the money supply by vast multiples. This "leverage" can work in either direction. In April 2010, I wrote an article explaining how this can result in … [Read more...]