Did Flatpoint High let you down? Don’t worry, PDers, we’ve got you covered for all your inflation explanation needs.
Inflation is the rise in the general price level of goods or services in an economy over a segment of time (one year to the next, one decade to another).
As the general price level rises, each unit of currency buys less goods and services. Therefore inflation reflects an overall erosion in the purchasing power of money, which is shown as a loss of real value in the internal medium of exchange and unit of account within an economy.
Example time: Let’s look at the onset of that monster from Jekyll Island. For the US Federal Reserve $1 back in 1913 is now the value equivalent to $24.04 today, a hundred and one years later.
Under that same principal, if you purchased a Coach handbag for $300 in 1991, then that purse would cost a $524.30 now.
Negative effects of inflation include increases to the opportunity cost of holding money which means that basically savers get dicked in an inflation scenario. Retirees that scrimped and saved now find that the money they budgeted to live from per month doesn’t cover what they hoped.
If inflation is rapid enough, shortages of goods will occur as consumers begin hoarding (or buying mass quantities not to use but to store for later use) out of concern that prices will increase in the future.
This happened in the 1970’s when the British started hoarding sugar, leading to a sugar shortage. If you’re an Are You Being Served fan you’ll recall that Mrs. Slocombe had stocked up so much, that if she didn’t keep eating it, then she’d never get rid of it.
Keynesians on the other side believe that inflation can have positive effects since it allows for central banks to “help” mitigate recessions through adjustments to real interest rates, and keeps their dreaded deflation at bay.
Deflation is the exact opposite of inflation. In deflation prices continue to lower, and the buying power of money increases. Superficially this is looked at by most as ideal. It would mean that with the same $5 from yesterday, you’d be able to buy more with it today, and even more with it tomorrow. In essence, you’d be getting richer and richer.
The argument is that this concept can only work for so long, as eventually the incentive to buy or produce evaporates. In 1839 to 1843, the US experienced a state of deflation due to an oversupply of agricultural commodities, mainly cotton, caused by massive federal land sales in the early 1830’s.
Next you’ve got stagflation where the rub of inflation really starts to set in on the economy. Stagflation occurs when the economy isn’t growing, but prices are, which is where Jim Rogers believes that Americans currently are.
The concept of stagflation is really just a hop, skip, and a jump from hyperinflation.
Now, hyperinflation is a fun one. There is no precise numerical definition for hyperinflation, but it’s where the price increases are so out of control and so astronomical that the concept of inflation becomes meaningless. This is Weimar.
The insanity of hyperinflation on an economy might be considered comical if it weren’t for the fact that it results in so many starving.
You’re welcome. We’re no Chuck Noblet, but our staff here at PD hopes this helps.