The thing about understanding inflation is this. It only tells you how fast the prices go up, and nothing at all about the actual prices or why they are going up. There are lot's of reason for price increases. Changing supplies of materials, good or poor growing seasons, weather, how the Red Sox are playing... whatever. The single *biggest* reason for inflation is government deficit spending. In order to spend money they don't have, they cause money to be magically created and then they borrow it while paying a percentage to.... to.... well, that is another story.
One must ask where that money wished into existence gets it's value. We all know there is nothing behind our dollar but luck and happy thoughts. So where does the funny paper get the value to trade for real stuff? Why, since nothing backs our dollar, then all dollars that exist suck from the same well of luck and happy thoughts, which is strictly a finite resource. That means every time more dollars are created the dollars already existing lose some value because they have to share it with new dollars.
When we speak about inflation, the rate at which prices are increasing, maybe 30% of increase is due to market forces and 70% due to political theft of our wealth. Every time Congress votes to spend money they don't actually have, the money in our pockets loses value. If that sounds oddly like sneaky back door taxation that most effects the poorest among us, then you've been thinking again. Careful, the thought police do not like that.
A good analogy for inflation is a balloon. Instead of air, it's filled with money. That balloon is the marketplace where goods are created and sold. Keeping to the analogy, newly created money is constantly being pumped into this marketplace balloon. The speed at which the balloon is being inflated is literally the inflation rate. The thing is-- the inflation never, ever, stops. We all know what happens when the Balloon (Marketplace) stretches beyond it's ability to assimilate additional air (Money).
POP! Not a big problem for a party balloon, but a huge problem if your family is in a basket and the balloon is holding you in the air.
My family is on a fixed income. My intake changes a tiny percentage yearly. Roughly one tank of gas a month is typical. Her income is fixed with fair yearly raises that almost meet the *real* inflation rate (which has little relation to the government politically approved number).
As inflation drops the spending value of our families dollars, the belt gets pulled tighter. Choices and tradeoffs must be made. Luxuries passed by. A couple years ago we ate out weekly. Now it's bi-monthly, maybe. It saddens me to see those restaurant parking lots less filled each day, because inflation taxes everyone. We all know what happens to business's that don't do enough business.
People most effected by inflation are people like us. Fixed incomes, and our money buys less every day. Reserves dwindle, and when the big hit comes along (Refrigerator dies) and it goes on a credit card. Now there's monthly credit cards to pay, and that money is coming out of all the rest of the budget. More choices, more tradeoffs, the balloon stretches thinner and thinner.
Soon enough.... POP!
Wish I had an answer. I don't. I'm just a guy struggling to get the ends of the family rope to touch. I gave up tying them years ago. There's no end in sight, no option in sight, and no help in sight. I'm down to one bottle of bottom shelf Bourbon a week, and next week is looking real iffy.
5 comments:
Inflation favors a debtor. Every payment is slightly smaller in real terms because the payment is fixed in dollar terms.
Deflation favors the lender.
Deflation tends to be bad for an economy because the value of the currency is going up relative to the goods purchased and that creates a strong incentive to put off purchases for as long as possible to get the best price.
Sellers end up with inventory purchased at a higher dollar price than they will be able to sell it for and if they borrowed to obtain the inventory they will not be able to service their loans.
I can see inflation profiting a debtor, but at the same time it slams every consumer at every level, being more harsh the lower the persons income. Even a homeowner owing 100K on a property, though they may save some wealth on the mortgage, will lose at every other expense.
Inflation never ends well. Every government thinks/assumes that "this time will be different." The really evil government officials know that this time won't be different, they just don't plan on being in the immediate area when the balloon goes pop.
That would be the Kerry's, Bush's, Cheney's, Clinton's and all their wicked minions. And a whole bunch of other 'connected' cloud dwellers.
Stack your preps deep, build your network and keep your powder dry. History rhymes.
True. I was just trying to explain why deflation is an economy killer.
But there's a kernel in there, since inflation favors the debtor... Why would the owner of the biggest debt in history do a damn thing about it?
Angus, that is a damned salient point.
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