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What do you mean that inflation will "wipe out debts" ? Can you elaborate some on that statement?
He's arguing that if hyperinflation will cause people's income to rise to such levels that they will easily be able to pay off the debts that were taken on when everything was cheaper (because the dollar bought more).
Say you have an annual income of $50K. You have $10K in credit card debt. High inflation sets in and causes the price of goods and services to sky rocket, which will eventually result in your paycheck skyrocketing because the system is flooded with cheapened money. Maybe now you will make $75K or $150K. Your credit card debt, however, still stays at $10K. You're in a much better position to pay it off.
For the average American, inflation is the MUCH better scenario. How would you handle it if your debt payments (home, car, credit cards) remained at their current levels, but your income dropped?
That's deflation, which is when there are too many goods for sale, and not enough dollars chasing them. In the case of deflation, people (and banks) like to hoard their money because they'll be able to buy more with it tomorrow. With less demand for goods and services, wages drop because there isn't enough work to go around.
Inflation is more dollars chasing fewer goods. People buy things as soon as they get money because prices are rising every day. When that happens, there is a boom in production, and workers can get more money because there aren't enough workers to go around.
Right now we're stuck in deflation which is making your mortgage and credit card payments more expensive relative to your wages. Eventually the pendulum will swing the other way, and we'll see inflation which will make your debts cheaper relative to your wages.
What a lot of people fear is that the government has put too much money into circulation, which could cause people to lose faith in the dollar as a currency. If that happens, we may experience hyperinflation, where people are desperate to get rid of cash which would mean that prices and wages could be 10X or even 100X higher, which would make your house and CC payments a drop in the proverbial bucket. That's good for the people who owe money, but it could completely destroy peoples life savings.
Back to the topic:
I think deflation is here for at least another year, but then the pendulum will swing back and we'll see some pretty serious inflation for a while. Its good to be in cash right now, and I'd be scared to tie up my money in anything longer than a 3-month CD.
Last edited by sterlinggirl; 01-12-2009 at 08:41 PM..
You can have BOTH -- deflation and inflation at the same time. Some things go up, some things go down. (Lots of folks don't get this -- they think it's got to be one or the other.)
Right now, we're seeing asset deflation and wage deflation. Values of houses, stocks, cars is going down. Wages are going down. Instead of cutting jobs, companies are cutting salaries, so they get more for less.
You may see hyperinflation of commodities due to flooding the system with money, so things like food, gas, clothes, start to go up. This may take a few years to happen yet. When it happens, you will not see a rise in wages. People will still be making low incomes, so they will be squeezed pretty hard.
That's deflation, which is when there are too many goods for sale, and not enough dollars chasing them. In the case of deflation, people (and banks) like to hoard their money because they'll be able to buy more with it tomorrow. With less demand for goods and services, wages drop because there isn't enough work to go around.
Inflation is more dollars chasing fewer goods. People buy things as soon as they get money because prices are rising every day. When that happens, there is a boom in production, and workers can get more money because there aren't enough workers to go around.
Right now we're stuck in deflation which is making your mortgage and credit card payments more expensive relative to your wages. Eventually the pendulum will swing the other way, and we'll see inflation which will make your debts cheaper relative to your wages.
What a lot of people fear is that the government has put too much money into circulation, which could cause people to lose faith in the dollar as a currency. If that happens, we may experience hyperinflation, where people are desperate to get rid of cash which would mean that prices and wages could be 10X or even 100X higher, which would make your house and CC payments a drop in the proverbial bucket. That's good for the people who owe money, but it could completely destroy peoples life savings.
Back to the topic:
I think deflation is here for at least another year, but then the pendulum will swing back and we'll see some pretty serious inflation for a while. Its good to be in cash right now, and I'd be scared to tie up my money in anything longer than a 3-month CD.
Inflation decreases your purchasing power, which means your dollar is worth less.
Thgis is quite different from the 70's recession in that during that one we had double digit inflation and unemployment . Then the reaction of government when Reagan took over was to reduce government spending and lower taxes to stimulate the economy. Companies went under quickly in that recession. After wards what we saw was a entire generation never enter the stock markets again. I really think that part will happen again and people will be much more Conservative on investment for decades.That was also the start of a real boom in small businesses in this country as many took the chance after being layed-off to try their hand at it.Many companies instead of doing the work in-house decided to hire these companies to do contract work.For example in Houston the oil exploration business pretty much got wiped out after the embargo. Many got layed -off and then opened consulting companies. That is when the Saudis and others started their relationship with these companies. It was common for oil men who had worked in this country to work oversea after that and still is.I really look for this recession to cause similar changes. JMHO
You might have the two balance out and cancel out each other. People will stop spending, wrecking the consumer economy. On the other hand, the government will spend like a drunken sailor and money will become next to worthless. People will have no money to spend, the government will buy or make everything for them, or at elast what they want them to have. I think that's Bush's and Obama's master plan.
Is it possible to have some deflation with severe federal deficits over the next couple of years? Would the increase in the money supply itself make this unlikely?
Is it possible to have some deflation with severe federal deficits over the next couple of years? Would the increase in the money supply itself make this unlikely?
I am told that it is possible, because the velocity of money has slowed. When money isn't circulating quickly, you can print as much as you want without inflation. Once its circulation speeds up - something we have no control over - then the currency could lose a lot of its value.
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