INFLATION

INFLATION

INFLATION OR DEFLATION,TELL ME IF YOU CANWILL WE BE ZIMBABWE ORWILL WE BE JAPAN?

INFLATION IS A GENERAL INCREASE IN PRICES OVER TIME, OR A GENERAL DECREASE IN THE VALUE OF MONEY

I JUST BOUGHT FOUR TIRESFOR ONLY $400

I REMEMBER WHEN $400BOUGHT AN ENTIRE CAR

THE MOST COMMON WAY TO MEASURE INFLATION IS WITH THE CONSUMER PRICE INDEX (CPI)THE CPI TAKES A REPRESENTATIVESHOPPING BASKET OF COMMONLY PURCHASED GOODS AND SERVICESAND TRACKS HOW THE PRICE OF THAT BASKET OF THINGS CHANGES OVER TIME.IF, IN 1920 THIS BASKET COST $20.00 TO FILL

AND IN 2012 IT COST $200.00 TO FILL WITH THE SAME ITEMS

CONSUMER PRICE INDEXTHEN THE PRICE LEVEL IN 2012 IS TEN TIMES WHAT IT WAS IN 1920CHANGES IN THE PRIORITIES OF CONSUMERS

CHANGES IN TECHNOLOGY

OF COURSE, ECONOMISTS HAVE TO ACCOUNT FOR CHANGES IN CONSUMPTION BEHAVIOR

THE CPI DOUBLED FROM 1985 TO 2009, SO ON AVERAGE THINGS COST TWICE AS MUCH

IF AN APPLE COST $.50 IN 1985ODDS ARE IT COSTABOUT $1.00 IN 2009A DOUBLING OF PRICES IN 24 YEARS SOUNDS LIKE A LOT OF INFLATIONBUT IN FACT IT AVERAGESOUT TO ONLY ABOUT 3%PER YEAR. THE RULE OF 72SAYS THAT WITH INFLATIONOF 3% PER YEAR, PRICESWILL DOUBLE IN ABOUT72/3 = 24 YEARS.

WHAT CAUSES INFLATION?

THE VALU E OF MONEY GOES DOWNWHEN THERES TOO MUCH MONEY

WHAT IS MONEY?

ANYTHING YOU CAN BUYSTUFF WITHCASHCHECKBOOK MONEYCREDITLOANSWHY DID HOUSING PRICES RISE SO RAPIDLY IN THE EARLY 2000s?

LOWER INTEREST RATES ALLOWED PEOPLE TO BORROW MORE AND BID UP PRICESRATIONING, PRICE CONTROLS AND PATRIOTISM

PENT UP DEMAND WAS RELEASED AFTER THE WAR

HIGH LEVELS OF INFLATION IN POST WORLD War ii AMERICALBJ CREATES THE GREAT SOCIETYLBJ EXPANDS THE VIETNAM WARDRAMATIC INCREASES IN GOVERNMENT SPENDING CAN CAUSE INFLATION

THE PRICE INDEX IN THE LATE 1960s RAPIDLY ACCELERATED FROM THE SPENDINGTHE O.P.E.C. OIL EMBARGO IN THE FALL OF 1973

SPURRED AN 11% RATE OF INFLATION IN 1974

INFLATION CAN ALSO BE THE RESULT OF A SUPPLY SHOCK

SEVERE DROUGHT IN 2012 AND THE IMPACT ON CORN PRICESHALF THE CORN CROP LOSTU.S. PRODUCES 40% OF THE WORLDS CORNGLOBAL FOOD SHORTAGESCATTLE FEED PRICES UPMEAT AND DAIRY PRICES UPETHANOL PLANTS IDLEGAS PRICES SPIKEHIGHER DELIVERY COSTS THUS RETAIL PRICESAIRLINE TICKET PRICES UPTOURISM REVENUE DOWNHIGHER HOUSEHOLD WATER PRICES AS MORE IS DIVERTED FROM CIVIC USE

HAVE YOU EVER HEARD SOMETHING LIKE THIS?INFLATION IS PARTICULARLY MADDENING BECAUSE PEOPLE SUFFER FROM MONEY ILLUSION

$3.00 FOR A GALLON OF MILK!!!?I REMEMBER WHEN IT WAS $.72 A GALLON

BASED ON OUR PREVIOUS COMPARISON, IF WE ADJUST FOR INFLATION, THAT $.72 GALLON OF MILK IN 1920 SHOULD COST $7.20 IN TODAYS DOLLARS.

THE OLD MAN HAS COMPARED THE NOMINAL PRICES OF MILK

THE REAL PRICE OF MILK HAS ACTUALLY FALLENIF MY WAGE WAS $.75/HR IN 1920

IF MY WAGE IS $15.00/HR IN 2012

IT ALSO TAKES FEWER HOURS OF LABOR TO BUY THINGS THAN IN THE PASTONE HOUR OF LABOR TO BUY MILK12 MINUTES OF LABOR TO BUY MILKINFLATION ERODES THE GAINS FROM SAVINGS

INFLATION MAKES IT DIFFICULT TO PREDICT PROFIT

INFLATION MAKES IT DIFFICULT TO COMPARE MONEY TODAY WITH MONEY TOMORROW

SAVERS AND LENDERS ARE REWARDED WITH A RATE OF INTEREST FOR THEIR RISK 5-3

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NOMINAL ANNUAL RATEOF RETURN OFFERED BYTHE BANKANNUAL RATE OFINFLATIONREAL RATE OF RETURN ON INVESTMENTTHE GAINS WILL BE LESS THAN YOU EXPECTEDBUSINESSES WILL INVEST IN NEW capital OR LABOR IF THEY BELIEVE THE REVENUE POTENTIAL IS GREATER THAN THE COST

The problem is if you dont know what things will cost, its difficult to estimate revenues.

LARGE AMOUNTS OF INFLATION CAN CAUSE SERIOUS DAMAGE TO ENTIRE ECONOMIESPRINTED CURRENCY TO PURCHASE FOREIGN RESERVES AND PAY OFF ITS DEBTS TO THE IMFPRINTED MORE CURRENCY TO PROVIDE 900% PAY RAISES TO POLICE AND ARMY PERSONNELPRINTED MORE CURRENCY TO PURCHASE OXEN AND PLOWS FOR THE RURAL FARMERSSHOPS CAN ONLY CASH CHECKS IF THE CUSTOMER WRITES IT FOR TWICE AS MUCH, THE VALUE WILL BE HALVED BY THE TIME IT CLEARS

ZIMBABWEAN GOVERNMENT GOES ON A SPENDING SPREEDEFLATIONCONSUMERS LOSE CONFIDENCE AND STOP SPENDINGPRICES FALLWAGES FALL AS A RESULT OF LESS BUSINESS INCOMECONSUMER DEBTS INCREASE AND EXISTING OBLIGATIONS BECOME HARDER TO MEET PEOPLE CUTBACK AND SAVE MAKING MATTERS WORSEJAPAN

NOT ENOUGH MONEY IN THE ECONOMY CAN BE EQUALLY DEVASTATING

THE NATIONS EXTRAVAGANT LIVING IN THE 1980S LED TO THE BURSTING OF AN ASSET BUBBLETHE GOVERNMENT INCREASED INTEREST RATES TO CONTROL PRICESJAPANS AGING POPULATION REJECTED EXCESS AND REDUCED SPENDINGCOMPETITION FROM OVERSEAS FORCED JAPANESE COMPANIES TO REDUCE PRICESINTEREST RATES HAVE FALLEN BUT THE GOVERNMENT REFUSES TO INFLATE THE CURRENCY OUT OF DEFERENCE TO THE ELDERLYPRICES AND WAGES REMAIN DEPRESSED TWENTY YEARS LATERJAPANS LOST DECADES

BAILING OUT BANKS AND INDUSTRIES, AND BUYING BONDSEXTENDING TAX CUTS AND EXPANDING WELFARE

IN RESPONSE TO THE GREAT RECESSION, OUR GOVERNMENT HAS TAKEN EXTRAORDINARY MEASURES

UNEMPLOYMENT IS STILL HIGH

CONSUMER AND BUSINESS CONFIDENCE IS LOW

YET THE U.S. ECONOMY HASNT REBOUNDED WITH ANY ENTHUSIASM

WILL THE U.S. BE ZIMBABWE OR JAPAN?

WILL OUR OLD SPENDING WAYS RETURNAND ALL OF THE MONEY GENERATED ASFISCAL AND MONETARY RESPONSES TOTHE CRISIS FLOOD THE ECONOMY?ORWILL THE DEPRESSION IN THE HOUSING MARKET AND LOWCONFIDENCE IN THE PROSPECTSFOR THE U.S. PLACE THE NATIONIN A RUT?