Thursday, May 31, 2012

Inflation

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For 1 years, from 1800 to 1, there was zero inflation. Since the abandonment of the gold standard in 1, there has been no restraint on the creation of money and debt out of thin air by the banking system. (1) Inflation has been a regular occurrence in our economy ever since. (1)

Since 150 there has been an 87% reduction in the value of a dollar. Based on the consumer price index, a dollar in 150 is worth only 1 cents today. (1) A postage stamp in the 150’s cost cents, and they now cost 7 cents, a 1% jump in inflation. (1) A gallon of gasoline cost 15 cents; today it costs about $1.65, an 1100% increase. (1) A new house in 15 averaged $14,00; today it’s $07,000, an inflation of 18%. (1) A dental crown used to cost $40; today it’s $640, an inflation of 1600%. (1) Several generations ago a person worked 1.4 months per year to pay for government; they now must work 5 months to do the same. (1) In the past, one wage earner families lived well and built savings, with minimal debt, and college educated their children without loans. (1) In the past, families commonly only had one parent working, today both parents must work to produce enough income to pay the bills. If this rate of inflation continues, what is the next option, putting your kids into the workforce? With so many mothers and fathers both in the workforce, the real losers are the children of these parents. They must be brought up by daycare or other forms of child care. When today’s 15-year old will retire, and with the value of today’s dollar being worth just 1 cents, the value of the dollar will be just cents when compared to the 150 dollar. (1)

Inflation by definition is the loss of a constant purchasing value of the dollar, caused by an increase of the supply of money and debt creation by the financial system at a faster rate than general economic growth, resulting in a rise in the general price level of goods and services. () Its opposite is deflation, a fall in the general price or a contraction of credit and availability of money. The U.S. Bureau of Labor Statistics produces the Consumer Price Index (CPI) yearly. The CPI measures average price changes in relation to prices in a randomly selected base year. () While the CPI is usually considered the most reliable estimate of inflation, some economists have questioned whether it overstates inflationary trends. Inflation results from an increase in the amount of circulating currency beyond the needs of trade. () When an oversupply of currency is created, the value of money decreases. () Deflation is brought about by the opposite condition. In the past, inflation was often due to a large entry of gold, such as took place in Europe after the discovery of America and at the end of the 1th century when new supplies of gold were found and exploited in South Africa. Recently the most common causes of inflation include government borrowing, the increase in the money supply, and a diminished supply of consumer goods which increase demand, causing prices to rise. ()

Inflation stimulates business and helps wages to rise, but the increase in wages usually fails to match the increase in prices, which causes actual wages to shrink. Stockholders sometimes falsely think they are making gains from increased business profits, but bondholders are actually loosing because their fixed percentage return has less buying power. () Borrowers also gain from inflation since the future value of money is reduced. Deflation lowers prices and increases unemployment through the depression of business. An abnormally steep and sudden rise in prices, sometimes called hyperinflation, may result in the eventual breakdown of an entire nations economic system. () One example of this occurred in Germany in 1 where prices rose ,500% in one month. () In the United States, annual price increases of less than about % or % are not considered indicative of serious inflation. () During the early 170s, however, prices rose by much higher percentages, leading President Nixon to apply wage and price controls in 171.

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To better understand what inflation is, imagine that everything was for sale on the entire planet. Every good or service that exists today has the value of 100 units. Also, imagine that all the money in the world is also equal to 100 units today. Now, imagine that people worked very hard and increased the availability of goods and services on the planet to 10 units, a gain of % in global GDP. This would cause a deflated dollar because less money is chasing a small surplus of goods. Now imagine that the total global money supply increased from 100 units to 11 units globally, up 1%. With 11 units of money chasing only 10 units of goods and services, global price levels will gradually rise. Since there are only a limited number of things on which money can be spent, and increase in the money supply that exceeds the increase of available goods and services over the same time period is inflationary. When more money chases fewer goods and services, inflation is the inevitable result. ()

Deflation occurs when one of things happen. () First, if the total money supply rises slower than an increase in goods and services. () Second, if the total money supply shrinks and the goods and services expand, deflation occurs. () Third, if the total money supply shrinks faster than goods and services contract, deflation occurs. ()

It is intimidating to think that the value of your savings may only be as valuable as the rate of inflation allows. It is scary to think about what might happen to our lifestyles if inflation continues at it’s steady pace. People’s wages need to be adjusted accordingly to the rate of inflation.

In conclusion, inflation is a problem that is not going to be solved unless we go back to the gold standard or by some other government stability.



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