Inflation. Is it so bad for the AVERAGE American?

[tnrtinr]

First I want to say that this is my first time posting a thread in this forum. I have been lurking for quite some time and I am amazed at the thoughtfulness of all of your responses. I respect all of your responses.

So here it goes.

Old numbers - but you get the idea.
http://www.gather.com/viewArticle.action?articleId=281474976753606

"According to USA Today and bankrate.com, the average debt of the American household is $84,454 and one out of every 73 of those households had to file for bankruptcy protection in 2003. The average credit card debt is around nine thousand dollars, triple what it was in 1990."

"For instance, medical debt is the cause of one in every 20 bankruptcies. The average medical debt for someone that files bankruptcy for that reason is around $25,000."

"If you knew that a $1,000 charge on a credit card would take almost 22 years to pay off, and would cost over $2,300 in interest in you only made the minimum payments would you only make the minimum payments? Most people do."

http://moneycentral.msn.com/content/SavingandDebt/P70581.asp

"Consumers owe nearly $2 trillion
American consumers owed a grand total of $1.9773 trillion in October 2003, according to the latest statistics on consumer credit from the Federal Reserve. Thats about $18,654 per household, a figure that doesnt include mortgage debt. The number is up more than 41% from the $1.3999 trillion consumers owed in 1998."

The average American is in debt. And we hear that inflation is bad and how the fed and their wild printing presses are going to cause inflation. But is it bad for the average American? Inflation kills the value of savings but debt is the best hedge against against inflation. Could inflation actually ease the burden of the average American by effective reducing the percentage of debt to income ration?

http://truthfullending.com/debt-hedge-against-inflation/

Hope I did a good job for my first thread in this forum. Please discuss.

 

[hom36rown]

Umm...yes. Wages will not rise as quickly as everything else...so now Americans will have to suffer with paying $10.00 for a loaf of bread, while still making $8.00 and still owing $10,000 in debt. Inflation fucks everyone over.

 

[tnrtinr]

Umm...yes. Wages will not rise as quickly as everything else...so now Americans will have to suffer with paying $10.00 for a loaf of bread, while still making $8.00 and still owing $10,000 in debt. Inflation fucks everyone over.

Wages will lag - but they will catch up quickly because people will not be able to afford to go to work and seek higher paying jobs. Now you are making $16 and have the same $10,000 in debt. You have literally cut your debt ratio in half. With hyper-inflation you could make $10,000 a WEEK which further cuts your debt ratio.

 

[hom36rown]

lag is not the word. It will be impossible for wages to rise in a stagnant economy.

 

[NoDrama]

The biggest problem with Inflation is when it gets so out of hand people stop accepting the currency as payment. Instead they will only take a barter trade or gold/ silver. What happens when you have nothing but cash and no one will take that cash? You will starve.

Inflation does make the house payments easier for the general public and any loan with set payments also will be easier for the consumer to pay off. that is IF he has any money left over after buying food. When you get paid 10,000 per week, but just a loaf of bread costs $10,000, which are you going to do first? Eat or lose your house, you can live without a house so it makes that question a no brainer.

 

[tnrtinr]

MY MISTAKE.

The concept I was trying to express is the increased money supply. We are fixated on inflation as it relates to prices but that phenomenon is lagging - I want to focus on the initial change when the market is flooded with cash. Prices fluxuate as a response to excess money in the market. The money is in the market long before menu prices are changed upward.

 

[tnrtinr]

While we are talking about inflation though - Remember that the Fed targets 1.5-2% inflation. Which sounds like a small reasonable number.

But think about that for a second. We know that the rule of 72 shows us the doubling time based on annual percentages. http://en.wikipedia.org/wiki/Rule_of_72

1.5% is a doubleing time of 48 years.
2% is a doubleing time of 36 years.

That means that everything (cpi) will be double the price in 33-48 years. That also means that your savings account / retirement accounts will have half the purchasing power in 33-48 years as it does now.

What you don't see is that this is an EXPONENTIAL function so as time goes on it spirals out of control.

 

[NoDrama]

Increased money supply IS the definition of Inflation. The first thing that happens is unjustified exuberance as people put their money into another bubble, it happens every time. As long as we have Fiat currency it will never change. The money in the market is first used by the banks as they issue the loans and create even more money in the process. Because they are the first to use it, there isn't much inflation adjustment of prices, not until it gets circulating do prices go up. You can stave off inflation the way the US does, by exporting Dollars in the form of T-Bills to foreign nations and also the currency itself so that other nations can purchase oil. You can only buy oil with US Dollars, its the product of being the worlds reserve currency. China, Russia, Brazil have already began trading for oil not using Dollars. As the rest of the world realizes that the Dollar is going to be worth nothing they will cash in their T-Bills and then the inflation will REALLY get going. Thats called "When the chickens come home to roost".


We normally run a 4-7% inflation, so prices double every 7-10 years. But one shouldn't really look at it as increase in prices, but devaluation of the dollar, because thats what it REALLY is. The dollar is worth less, which is why prices go up. From 1776 to 1913 the dollar held its value and only wavered by a grand total of 16 cents from high to low over that period, since 1913 and the Inception of the Federal Reserve the dollar has lost 95% of its value, with the single greatest period of devaluation begining in 1971 after Nixon closed the Gold Window and the Dollar was thrust upon the world with no backing other than a promise.

 

[tnrtinr]

Increased money supply IS the definition of Inflation.

No it is not. Inflation has to do with prices.

If the money supply doubles and the population doubles during that same period ceteris paribus - there will be ZERO inflation.

 

[tnrtinr]

Increased money supply IS the definition of Inflation. The first thing that happens is unjustified exuberance as people put their money into another bubble, it happens every time. As long as we have Fiat currency it will never change. The money in the market is first used by the banks as they issue the loans and create even more money in the process. Because they are the first to use it, there isn't much inflation adjustment of prices, not until it gets circulating do prices go up. You can stave off inflation the way the US does, by exporting Dollars in the form of T-Bills to foreign nations and also the currency itself so that other nations can purchase oil. You can only buy oil with US Dollars, its the product of being the worlds reserve currency. China, Russia, Brazil have already began trading for oil not using Dollars. As the rest of the world realizes that the Dollar is going to be worth nothing they will cash in their T-Bills and then the inflation will REALLY get going. Thats called "When the chickens come home to roost".


We normally run a 4-7% inflation, so prices double every 7-10 years. But one shouldn't really look at it as increase in prices, but devaluation of the dollar, because thats what it REALLY is. The dollar is worth less, which is why prices go up. From 1776 to 1913 the dollar held its value and only wavered by a grand total of 16 cents from high to low over that period, since 1913 and the Inception of the Federal Reserve the dollar has lost 95% of its value, with the single greatest period of devaluation begining in 1971 after Nixon closed the Gold Window and the Dollar was thrust upon the world with no backing other than a promise.

People can invest in a bubble, they can pay debts - but the government is essentially monetizing the debt to pay back obligations with devalued currency.

It is funny cause I was talking to my grandma and she was saying that in the old days everything was cheap - but nobody had any money to buy anything. She was saying nobody had stuff like they do now. So our currency may not be worth what it was in 1913 but we have a LOT more of it laying around.

 

[ilkhan]

No it is not. Inflation has to do with prices.

If the money supply doubles and the population doubles during that same period ceteris paribus - there will be ZERO inflation.

No Drama is correct Inflation IS money creation.
Mearly being fixated on price increase and ignoring money creation is what fouls most Keyenesiens up.
Inflation IS a tax and it always attacks the poor and middle class the worst.
I do see your point controling though Zero inflation, It goes with supply and demand.
IMO

Here is a short read on the subject from the Misses institute If you care to delve into it.
Just FYI to see what we are talking about.

http://mises.org/story/908

Some people, long dead, would be so amazed at the really lively debates we have about economics.
On the internet Laymen, Keyenisian, and Austrians even Chicago school. Its weird to think about...

 

[Parker]

Wages will lag - but they will catch up quickly because people will not be able to afford to go to work and seek higher paying jobs. Now you are making $16 and have the same $10,000 in debt. You have literally cut your debt ratio in half. With hyper-inflation you could make $10,000 a WEEK which further cuts your debt ratio.

Incorrect. Not everyones wages increase. People whose wages do not will fall further into debt.

 

[tnrtinr]

No it is not. Inflation has to do with prices.

If the money supply doubles and the population doubles during that same period ceteris paribus - there will be ZERO inflation.

No Drama is correct Inflation IS money creation.
Mearly being fixated on price increase and ignoring money creation is what fouls most Keyenesiens up.
Inflation IS a tax and it always attacks the poor and middle class the worst.
I do see your point controling though Zero inflation, It goes with supply and demand.
IMO

Here is a short read on the subject from the Misses institute If you care to delve into it.
Just FYI to see what we are talking about.

http://mises.org/story/908

Some people, long dead, would be so amazed at the really lively debates we have about economics.
On the internet Laymen, Keyenisian, and Austrians even Chicago school. Its weird to think about...

Please explain how the example below would lead to inflation.

If the money supply doubles and the population doubles during that same period ceteris paribus.

This is a shift in supply and demand for dollars both proportionately to the right. You CAN increase the money supply without creating inflation. They are USUALLY tightly related concepts but inflation is different than an increase in the money supply.

If the money supply did not increase with an increase in population there would be a shortage of money. Imagine if the US had the same amount of money in circulation as we did in the 1800's!

 

[doobnVA]

No it is not. Inflation has to do with prices.

If the money supply doubles and the population doubles during that same period ceteris paribus - there will be ZERO inflation.

Wrong.

Inflation is caused by devaluation of the dollar. This happens when the Fed decides to print more money. More money means each dollar has a diminished value.

Remember how your mom always told you that money doesn't grow on trees? Well she was right. You can't just pump more currency into circulation without diminishing it's value. That's why people are so worried about inflation right now. The dollar is already down in value, and they want to print more freakin' money. It doesn't make sense.

Yes, inflation is really that bad for the average American. Just because prices go up, doesn't mean WAGES are going to go up. Hell, minimum wage was stagnant for damn near ten years but prices were steadily climbing, weren't they?

Let's say you currently make $10 per hour. A gallon of milk is about $4. Let's say inflation drives prices up to 5x what they are currently. A gallon of milk would now cost $20, but you're still only making $10 per hour. That means you have to work 2 full hours just to buy ONE gallon of milk. Essentially everything will cost you 5x what it currently does, which means you really need to earn $50 per hour to maintain your standard of living. In a recession or depression, NOBODY is going to pay you $50 per hour, because even employers are subject to inflated prices so it costs them 5x more to operate.

Population does not affect inflation in the way you have described. A double in population would not mean inflation would be zero, it would remain the same or may even inflate more due to economic stress from increased consumption.

 

[tnrtinr]

Wrong.

Inflation is caused by devaluation of the dollar. This happens when the Fed decides to print more money. More money means each dollar has a diminished value.

Remember how your mom always told you that money doesn't grow on trees? Well she was right. You can't just pump more currency into circulation without diminishing it's value. That's why people are so worried about inflation right now. The dollar is already down in value, and they want to print more freakin' money. It doesn't make sense.

Yes, inflation is really that bad for the average American. Just because prices go up, doesn't mean WAGES are going to go up. Hell, minimum wage was stagnant for damn near ten years but prices were steadily climbing, weren't they?

Let's say you currently make $10 per hour. A gallon of milk is about $4. Let's say inflation drives prices up to 5x what they are currently. A gallon of milk would now cost $20, but you're still only making $10 per hour. That means you have to work 2 full hours just to buy ONE gallon of milk. Essentially everything will cost you 5x what it currently does, which means you really need to earn $50 per hour to maintain your standard of living. In a recession or depression, NOBODY is going to pay you $50 per hour, because even employers are subject to inflated prices so it costs them 5x more to operate.

Population does not affect inflation in the way you have described. A double in population would not mean inflation would be zero, it would remain the same or may even inflate more due to economic stress from increased consumption.

You are wrong - simply printing money does not devalue the currency. PERIOD. You are melding two concepts.

There are two things that will affect the value of the dollar - the supply of dollars and the demand for dollars. It is possible to print more dollars and have the value of the dollar increase, remain unchanged, or decrease depending on the demand for those dollars.

Printing money when the demand remains unchanged or is decreasing will cause inflation ceteris paribus. Ceteris paribus - Printing money when the demand for dollars is increasing will cause the 1. value of the dollar to increase, 2. stay the same or 3. decrease depending on whether 1. not enough money is printed to satisfy demand 2. the exact amount of money is printed as is demanded 3. more money is printed then the demanded

Money supply and inflation / deflation are TWO seperate concepts.

"Because money is used in virtually all economic transactions, it has a powerful effect on economic activity. An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending. Business firms respond to increased sales by ordering more raw materials and increasing production. The spread of business activity increases the demand for labor and raises the demand for capital goods. In a buoyant economy, stock market prices rise and firms issue equity and debt. If the money supply continues to expand, prices begin to rise, especially if output growth reaches capacity limits. As the public begins to expect inflation, lenders insist on higher interest rates to offset an expected decline in purchasing power over the life of their loans."

 

[NoDrama]

It seems that people often confuse the cause of inflation with the effect of inflation and unfortunately the dictionary isn't much help. The modern definition of inflation is "A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money..."
In other words according to this definition inflation is things getting more expensive.
But that is really the effect of inflation not inflation itself. The American Heritage® Dictionary of the English Language, Fourth Edition, Copyright © 2000 Published by Houghton Mifflin Company goes on to say:
...caused by an increase in available currency and credit beyond the proportion of available goods and services.
In other words, the common usage of the word inflation is the effect that people see. When they see prices in their local stores going up they call it inflation.
But what is being inflated? Obviously prices are being inflated. So this is actually "price inflation".
Price inflation is a result of "monetary inflation".
Or "monetary inflation" is the cause of "price inflation".
So what is "monetary inflation" and where does it come from?
"Monetary inflation" is basically the government figuratively cranking up the printing presses and increasing the money supply.
In the old days that was how we got inflation. The government would actually print more dollars. But today the government has much more advanced methods of increasing the money supply. Remember, "monetary inflation" is the "increase in the amount of currency in circulation".
But how do we define currency in circulation? Is it just the cash in our pockets? Or does it include the money in our checking accounts? How about our savings accounts? What about Money Market accounts, CD's, and time deposits?

"The Federal Reserve tracks and publishes the money supply measured three different ways-- M1, M2, and M3. ​

These three money supply measures track slightly different views of the money supply with M1 being the most liquid and M3 including giant deposits held by foreign banks. And M2 being somewhere in between i.e. basically Cash, Checking and Savings accounts.
Interestingly, the FED decided to stop tracking M3 effective March 23, 2006 for some mysterious reason.
But back to the question of the cause of inflation. Basically when the government increases the money supply faster than the quantity of goods increases we have inflation. Interestingly as the supply of goods increase the money supply has to increase or else prices actually go down.
Many people mistakenly believe that prices rise because businesses are "greedy". This is not the case in a free enterprise system. Because of competition the businesses that succeed are those that provide the highest quality goods for the lowest price. So a business can't just arbitrarily raise its prices anytime it wants to. If it does, before long all of its customers will be buying from someone else.
But if each dollar is worth less because the supply of dollars has increased, all business are forced to raise prices just to get the same value for their products.

 

[doobnVA]

You are wrong - simply printing money does not devalue the currency. PERIOD. You are melding two concepts.

There are two things that will affect the value of the dollar - the supply of dollars and the demand for dollars. It is possible to print more dollars and have the value of the dollar increase, remain unchanged, or decrease depending on the demand for those dollars.

Printing money when the demand remains unchanged or is decreasing will cause inflation ceteris paribus. Ceteris paribus - Printing money when the demand for dollars is increasing will cause the 1. value of the dollar to increase, 2. stay the same or 3. decrease depending on whether 1. not enough money is printed to satisfy demand 2. the exact amount of money is printed as is demanded 3. more money is printed then the demanded

Money supply and inflation / deflation are TWO seperate concepts.

"Because money is used in virtually all economic transactions, it has a powerful effect on economic activity. An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending. Business firms respond to increased sales by ordering more raw materials and increasing production. The spread of business activity increases the demand for labor and raises the demand for capital goods. In a buoyant economy, stock market prices rise and firms issue equity and debt. If the money supply continues to expand, prices begin to rise, especially if output growth reaches capacity limits. As the public begins to expect inflation, lenders insist on higher interest rates to offset an expected decline in purchasing power over the life of their loans."

I cut and pasted this from the same web site you cut and pasted yours from:

"In less formal terms, putting more dollars in circulation dilutes the purchasing power of each dollar"

Inflation is a DIRECT result of money supply and demand. They are not two separate concepts.

 

[budsmoker87]

You are wrong - simply printing money does not devalue the currency. PERIOD. You are melding two concepts.

There are two things that will affect the value of the dollar - the supply of dollars and the demand for dollars. It is possible to print more dollars and have the value of the dollar increase, remain unchanged, or decrease depending on the demand for those dollars.

Printing money when the demand remains unchanged or is decreasing will cause inflation ceteris paribus. Ceteris paribus - Printing money when the demand for dollars is increasing will cause the 1. value of the dollar to increase, 2. stay the same or 3. decrease depending on whether 1. not enough money is printed to satisfy demand 2. the exact amount of money is printed as is demanded 3. more money is printed then the demanded

Money supply and inflation / deflation are TWO seperate concepts.

"Because money is used in virtually all economic transactions, it has a powerful effect on economic activity. An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending. Business firms respond to increased sales by ordering more raw materials and increasing production. The spread of business activity increases the demand for labor and raises the demand for capital goods. In a buoyant economy, stock market prices rise and firms issue equity and debt. If the money supply continues to expand, prices begin to rise, especially if output growth reaches capacity limits. As the public begins to expect inflation, lenders insist on higher interest rates to offset an expected decline in purchasing power over the life of their loans."

here's where you flat out said exactly what nodrama was eluding to. When you toss more money into circulation, the value of the dollar plummets, but the value of goods doesn't plummet, because production stays the same...and, as we're seeing with more and more lay offs, production is often haulted when the currency is hyper-inflated.

...and since our GDP is 72% consumerism, we don't have a whole lot of production goin on

i see what ur sayin about population, but i don't think it makes a difference at all when you're dumping tens of trillions of fiat dollars into circulation ALL at ONCE, in some sorta desperate, incompetent attempt to "save the economy"...which is not gonna happen

 

[budsmoker87]

I cut and pasted this from the same web site you cut and pasted yours from:

"In less formal terms, putting more dollars in circulation dilutes the purchasing power of each dollar"

Inflation is a DIRECT result of money supply and demand. They are not two separate concepts.

^truth spoken

 

[max420thc]

Wages will lag - but they will catch up quickly because people will not be able to afford to go to work and seek higher paying jobs. Now you are making $16 and have the same $10,000 in debt. You have literally cut your debt ratio in half. With hyper-inflation you could make $10,000 a WEEK which further cuts your debt ratio.

with 30% unemployment wages catching up is a dream..
and with the government spending 18 trillion dollars in the last 8 months or so..
that means the government spent the average american family 180K dollars deeper into debt..on top the the ten trillion we had earlier. so we are looking at the average american family owes..to the government for their portion of the debt 280K dollars each.
i dont think the americans idiot spending can even match that of the governments.
80K is just a drop in the bucket. obama doubles that debt for you..and you didnt get anything out of it in just a few short months..wasnt that nice of him and the liberals?