Thursday, February 19, 2009

Inflation

I keep bumping into people who seem
1) surprised that I think inflation is a certainty, and
2) can't really understand why I care about inflation.

As for the second one, I suddenly realized that much of the country doesn't know what it's like to live with inflation. Actually, I'm about the youngest of the folks who do. I got my first jobs during the Carter years. I took my high-school and college econ classes during the Carter years. My husband and I were engaged during the Carter years and started planning out our budget and looking for apartments. Some of the money we received as wedding gifts was invested in a CD that paid 18% ... just before a new president changed some policies and began to rein in inflation. (So we really benefited from the rates on that CD!)

People younger than I am didn't have the experience of "buy it NOW because it's going to be more expensive next month!" People younger than I am don't remember what it's like to have a passbook saving account that paid the standard 5% interest (which sounds outrageously high now, in the days of 0.4% interest) and have that money be losing losing losing value.


As for the first (that inflation is a certainty) there is a simple economic principle. If the government has to start printing money to pay out what it wishes to subsidize, then there's more money without anything of value to back it up -- no wealth created but just more paper dollars floating around. This can't do anything BUT result in inflation.* And so when I "worry" about inflation, it's not speculation or irrational fear; it's just an expectation that things will happen according to the way they must happen. If you push the car off the cliff, it will fall and crash, because gravity is an unavoidable law. If you crank up the govt printing presses, we will see inflation. Actually, right now, what I expect to happen with inflation might make the double-digit inflation of the Carter years (that is, just barely slipping past the single-digits) look like "the good old days."




*If this isn't obvious to you, there's a simple book, written for kids, that explains economics in a most understandable way. If only we could get all the Congressmen to read it! Whatever Happened to Penny Candy by Richard Maybury should be available at your library, and it can be read in a few hours or less. But you oughtn't read it that quickly, so that you have time to let it soak in, and time to figure out the ramifications of what he's explaining. Don't let it intimidate you because it's economics; it's perfect for pre-teens and even for bright 3rd-graders.

7 comments:

  1. I know all about inflation even though I'm a whippersnapper. :)

    Overseas, inflation of the local currency got so bad during the last few years that we were there that my mom could buy $300 (Liberian dollars)of groceries and write a check drawn on a US bank for $150.

    People with no access to the US dollar were up a crik without a paddle, though. :(

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  2. Oh, gosh... and look what happened next in Liberia...

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  3. You are exactly right about inflation. It's coming. And some people won't feel the pinch as much as others because their wages will also inflate so they will have correspondingly higher buying power. But the wages of many will not keep up, and then they'll notice.

    My husband says now is the time to take stock and come up with a list of things we expect to have to buy in the next few years and if at all possible buy them now before inflation sets in. Then hunker down and try to ride out the storm.

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  4. The book written by Henry Hazlitt, _Economics in One Lesson_ is also quite easy to understand. It should be available on line somewhere for free.

    -Pr. E. R. Fickel

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  5. I saw an article today, linked from Drudge, that indicated that economists were surprised by the uptick in inflation last month. My first thought was, "I'm not even an economist and I was expecting it."

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  6. I was reading "Penny Candy" with the kids today. One of the things he starts with is that there are certain LAWS of economics. "If you do this, then that will happen." It's not a matter of opinion. It's not a matter of speculation. It's not prediction. It's certainly not BELIEF.

    If the govt increases the money supply, then there is (by definition) inflation. One of the results of inflation (that is, increased amount of money) is an increase in prices. It can't be any other way.

    How hard is this?

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  7. Nathan Fischer2/19/2009 9:29 PM

    During the last election, I read a lot about this for the first time. From what I found, during the early Reagan years inflation was so bad that they had to eliminate the production of money so much that it forced the economy into a "planned" recession - all just in order to stop out of control inflation.

    I'm really afraid of what's going to happen if/when we end up in a Great Depression-like economy with extreme inflation *and* we eventually figure out that we have to restrict the flow of money to bring inflation down (thus causing the depression to worsen) in order to start boosting the economy, again.

    It's going to be really, really bad...

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