Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
As a consumer inflation is the evil, but as a business its a good thing?
somebody made comment..
Quote:
""Got a store selling candy for 5$ each. 2 workers are getting paid $5 a hour and worked 2 hours. so now they have 10 bucks and they want candy. They go 2 candy bars each. Now a week later, same workers got a raise to 10$ a hour and went back and buy 2 candy bars each, and saved 10 bucks. Owner hears the news and heard about the raises these workers are getting, and now raise his candy bars to $10 each. Workers are shock that the bars went up and now just bought one each. So again why did the store raise the price, when it was selling just fine at $5 each?""
The bold is what i cant grasp. Just rise the debt of the person?
Quote:
When the economy is not running at capacity, meaning there is unused labor or resources, inflation theoretically helps increase production. More dollars translates to more spending, which equates to more aggregated demand. More demand, in turn, triggers more production to meet that demand.
Famous British economist John Maynard Keynes believed that some inflation was necessary to prevent the "Paradox of Thrift." If consumer prices are allowed to fall consistently because the country is becoming too productive, consumers learn to hold off their purchases to wait for a better deal. The net effect of this paradox is to reduce aggregate demand, leading to less production, layoffs and a faltering economy. Inflation also makes it easier on debtors, who repay their loans with money that is less valuable than the money they borrowed. This encourages borrowing and lending, which again increases spending on all levels. Perhaps most important to the Federal Reserve is that the U.S. government is the largest debtor in the world, and inflation helps soften the blow of its massive debt.
Economists once believed in a real inverse relationship between inflation and unemployment, and that rising unemployment could be fought with increased inflation. This relationship was defined in the famous Phillips curve. The Phillips curve was largely discredited in the 1970s, however, when the U.S. experienced "stagflation," or high levels of inflation and rising unemployment at the same time; thought to be impossible at the time.
The bold is what i cant grasp. Just rise the debt of the person?
Nothing in the bolded section you quoted says that.
Inflation makes borrowing money more attractive, because any loan will be paid back in the future with dollars that are worth less than they are today, and it makes saving less attractive, as the money saved will be worth less in the future than it is today. Deflation flips that equation around, and favors saving over borrowing and spending (as your money will be worth more tomorrow that it is today in a deflationary environment). So people are more likely to borrow money for a necessary purchase in an inflationary environment, and to pay cash for a necessary purchase in a deflationary environment. And they are more likely to spend "extra" money in an inflationary environment (as any money that is saved is losing value), and to save "extra" money in a deflationary environment (as any money that is saved will buy more tomorrow in a deflationary environment). That's all that paragraph is saying.
Nothing in the bolded section you quoted says that.
Inflation makes borrowing money more attractive, because any loan will be paid back in the future with dollars that are worth less than they are today, and it makes saving less attractive, as the money saved will be worth less in the future than it is today. Deflation flips that equation around, and favors saving over borrowing and spending (as your money will be worth more tomorrow that it is today in a deflationary environment). So people are more likely to borrow money for a necessary purchase in an inflationary environment, and to pay cash for a necessary purchase in a deflationary environment. And they are more likely to spend "extra" money in an inflationary environment (as any money that is saved is losing value), and to save "extra" money in a deflationary environment (as any money that is saved will buy more tomorrow in a deflationary environment). That's all that paragraph is saying.
Ok thanks for the correction..
How is it worth less today vs tommrow.. whats changing?
How is it worth less today vs tommrow.. whats changing?
The price of goods and services is what's changing. In an inflationary environment, the price of goods and services is rising over time. In a deflationary environment, the price of goods and services is falling over time.
Examples:
In an environment experiencing 2% annual inflation, and item that costs $100 today will cost $102 dollars next year. So $100 buys you bit more today than it will next year.
In an environment that is experiencing 2% annual deflation, and item that costs $100 today will cost $98 next year. So your $100 will buy you a bit more next year than it does right now.
So these are some pretty complicated topics. I'll try and explain.
Inflation, controlled inflation is the goal. The current target is 2% and that is a fair target which indicates a healthy economy when inflation is around that number.
Deflation is terrible for business. You could see this when oil was shooting up and down all over the place. Gas station owners were being forced to sell their gas for less than they paid for it because prices were shooting up and then dropping rapidly. Some of these folks ended up having to sell for less than they paid or risk not being able to sell.
Anyway, this is avoided at all costs. Deflation is very bad. It happens in small pockets of the economy from time to time. GM's fire sale when it was going into bankruptcy during the last recession is another good example. You don't want to see that extend to the broader economy though because it is unhealthy to say the least.
So since deflation is so very bad, a little bit of inflation is a good thing. All things equal.
Which they aren't but we can keep this simple. The big issue is that wages haven't been keeping pace with inflation so people on the bottom 2/3' of the economy are fairing much worse off than say they would in the 70's but on the top 1/3 things are much better. Certain things are excluded from inflation measurements as well which keeps the number lower than it really is. That is another thing entirely. Anyway, the CPI and other touted measurements aren't perfect and inflation without wage growth is really bad, enough said.
Now as for the bold part you quoted, yes in general, inflation helps heavy debtors. This has to do with the time value of money. Let me explain
This assumes a few things:
1. Fixed interest
2. Inflation is high enough to matter, which it generally is.
Think about this. If I gave you 100k today, what could you do with it?
Now if I gave you 100k in 1988 could you do more with it?
That answer is a whopping "hell yes i can do more with 100k in 1988 than today".
Well let's take that and go from today to the future.
Let's say I borrowed 250k, 3 years ago at 3.5% for 30 years fixed. The economy continues to hum along, we enter a period of inflation due to heavy goverment debt and consumer stimulus. Inflation target is at 2% already, if the banks are charging me 3.5% they are only really only making 1.5% per year on their money over 30 years. Not a huge percentage. Good time to borrow, which people when presented the opportunity tend to use it.
As inflation rises, interest rates will also rise and as such the value of my loan to me as the consumer rises with the increase in interest rates. When interest rates are 6% for 30 years and my loan is 3.5% that is a tremendous value. The opposite side of that is the bank, who could be loaning money at 6% now is stuck in a 3.5% fixed rate for 30 years. They are getting screwed with my loan that isn't making them any money and worse, with inflation higher, likely is losing principal.
Now as inflation rises, wages should rise. This is a big sticking point, they should rise. Wages are supposed to rise. I could say that 100 more times and it wouldn't be enough. Wages should rise. They aren't though and haven't been, but they should. Let me explain the problem:
1. Wages rise
Heavy debtors are making more in the future. The value of the money is less due to inflation (remember penny candy? Well we have quarter candy, see money is worth less later on), so paying it off is easier. Kind of like comparing paying off that 50k house you bought in the 80's (paying that in 50k in today money) vs paying off the 250k house it is today. So being in heavy debt during periods of high inflation is actually good.
2. Wages stagnant
This is where we are now. Wages have kind of stagnated for most of America and it is a really bad sign. The reason is complicated but in general jobs on the bottom 2/3 of the economy are easily substituted. Thus employers haven't been paying more for them. Short of government intervention of a price floor, combined with incentives to keep employees over automation, they likely will always languish with poor wages.
What ends up happening in situations like this though is the goverment is still pumping out stimulus, people borrowed to maintain lifestyle and now both are pretty close to being tapped out.
Interest rates are rising, that puts pressure on the bottom 2/3 who already haven't seen wages keep pace with inflation and have borrowed to stay afloat. Eventually consumer spending starts to stagnate. Government spending also stagnates because you simply can't keep borrowing 1.4T a year forever and ever. You also have to deal with social security and a medical system in need of an enema which are two very expensive items on the nearby horizon. This leaves little money left for further stimulus. If anything, taxes have to rise to pay for the excess of the last 30 years or so much less future obligations. Further reducing the ability to spend. Without immigration our population growth is near 0. Yet another very long term indicator of a major problem. Consumer economies need population growth to sustain themselves otherwise when society becomes top heavy it doesn't work as well.
In situations like that, heavy debt is less of an advantage. Ultimately inflation remains tame (remains in check due to poor consumer spending / recession), the advantages of being in heavy debt are nill and you run the real possibility of deflation in the economy or worse, Stagflation.
Right now, we are insulated to the threat of Stagflation due to our unique position as world reserve currency holder. Should that ever change, the ensuing economic **** show would only described as epic.
So the big question is, if the economy wants that annual %2, then what can be done to stop it till wages get caught up? If wages do ever get caught up? How can we have inflation without inflating the money to send for such goods? To me, inflation means we dont have enough money going around, vs deflation when everybody has a dollar to spend. Like the candy comment. Store was selling just fine a x amount of price, then hears that were all getting a raise and now wants to increase it. ( because the workers has more money to spend, doesnt mean they are going to spend it) Isnt the idea is to keep COL/Goods lower then the person salary so we all can spend?
If they just stop inflation now for next 10 years, what situation would we be in ( not assuming).
To me, inflation means we dont have enough money going around...
Quite the opposite: inflation is often a sign that there is too much money floating around. What do you think would happen if everyone woke up tomorrow and found they had twice as much money as they do today? Prices of essentials would quickly double, as you'd still have the same number of people competing for the same limited resources. They'd just be competing against each other with more dollars.
Quote:
If they just stop inflation now for next 10 years, what situation would we be in ( not assuming).
Who is this "they" you keep referring to in your posts? I hate to break it to you, but the Illuminati aren't running the economy. No single entity is in control of it (which is one reason why it's difficult to predict how it will change in response to changes in economic policies and laws).
Quite the opposite: inflation is often a sign that there is too much money floating around. What do you think would happen if everyone woke up tomorrow and found they had twice as much money as they do today? Prices of essentials would quickly double, as you'd still have the same number of people competing for the same limited resources. They'd just be competing against each other with more dollars.
Who is this "they" you keep referring to in your posts? I hate to break it to you, but the Illuminati aren't running the economy. No single entity is in control of it (which is one reason why it's difficult to predict how it will change in response to changes in economic policies and laws).
I assume "they" banks, government treasury, since they control the interest rates of borrowing money.
Way prices are now, would not think we have too much money floating around due to stagnate wages we are in. If we have too much floating, then it should be reflecting in our pay, not reflecting in cost of goods.
Why cant a $1 be worth its actual $1? what purpose does it need to be "inflated" more then it is worth. Its still a $1.
Thanks for taking time to answering. Tech is my strong point, economy speculation is my weak and pet-peive.. how can one speculate on something that never been accomplished. (oil market is prime example)
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
