Wednesday, April 1, 2009

Inflation? What's Inflation?

I often wondered about the best way to define or describe inflation and have never found a way to present it in a way that satisfies my understanding. Statements like "Too many dollars chasing too few goods" or "an increase in the price of a basket of goods and services that is representative of the economy as a whole" have never had any real meaning to me. That is why when I heard Neal Boortz explain it a few weeks ago, it finally clicked for me. This is how he explained it:

  • Imagine that you are at an auction buying items from all over the world. You have a certain amount of money, someone else has half that amount, and someone else has three times your amount. The auction is going along, and the people bidding on things have some idea of what they are willing to pay for the items being sold. Now, let's say that someone calls timeout on the bidding and brings in a few stacks of hundred dollar bills. He sets them on the table and walks away saying, "Have at it, boys!" After the orderly scramble to get your share of the piles of money is over, the auction resumes. Now, think about what will happen to the bidding after everyone has more dollars to bid. The prices "sure as hell" aren't going down.

Now, our government has decided to put 10,000,000,000 hundred dollar bills (that's $1,000,000,000,000 for the Tceh graduates out there) into the U.S./world economy. Does anybody want to take a guess about what is going to happen to the price of EVERYTHING in the next couple of years? My bet is that we will look back on the Carter years with fondness after this stagflation hits us in the face.

Here's some free advice (I am sure it's worth what you paid for it): If you have credit card debt, pay it off. If you have adjustable rate loans tied to the FED rate, find a way to get out of it to something fixed. Basically, get out of debt as fast as you can. Interest rates are going to skyrocket once this inflation train starts rolling. With that cheerful thought, have a good evening.

1 comment:

Josh and Margo said...

Did you see what Obama gave the Queen as a gift?

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