Inflation, the loss of purchasing power over time, is a consuming subject in a time of global recession because the level of inflation in an economy determines how far a paycheck will go.
The American Heritage dictionary defines inflation “as the persistent increase in prices.” It also defines it as “the persistent decline in the purchasing power of money.” In other words, inflation is when your dollar can buy less and less every day.
In America, for example, in 1920, it cost an average of twenty-five cents to go to see a movie show. Today, in 2009, a movie ticket costs an average of seven dollars. That’s inflation, and it’s eating away at our economy.
The Causes Of Inflation
Numerous reasons exist for inflation, perhaps even too many to catalog. Generally, however, high interest rates, an increase in taxation, and a new scarcity of a popular product, like gasoline, for example, are considered predominant causative factors.
However, cyclical causes, too, can cause inflation. The cost of running a business causes the price of its goods and services to increase. This cost, passed on to the consumer, means that paychecks don’t go as far. Since the employee now asks for increased wages to meet the new price of living, this again forces the cost of a business to go up. In essence, then, inflation is a vicious cycle–because it perpetuates itself.
Two types of inflation occur in any economy. One is natural inflation and the other is artificial inflation.
- Natural inflation is a result of price increase due to a change in supply and demand. If demand outstrips supply, the price of the product will rise in price.
- Artificial inflation is a result of a price increase due to an external force. In the United States, after the economic stimulus plan, billions of extra dollars were pumped into the economy causing even more inflation.
When the supply of money in an economy falls, simply printing more money can drop the value of money. The money printed and distributed by the federal bailout, extra money not related to demand or supply nor tied down by a gold standard, reduced the value of every dollar.
Germany after World War I is a classic example of how more money pumped into an economy reduces the value of money. After the first world war, Germany, faced with $33 billion in war reparations, simply could not produce the money from a dynamic exchange of goods and services, the usual way money is generated in an economy.
In desperation, the government printed the money, money that was not backed by a gold standard. The result was disastrous. Something that cost one mark in 1919 cost 726 billion marks in 1923. One U.S. cent was worth 42 billion marks!
Sometimes inflation can be a result of both natural and artificial causes. In America, the rising price of gas is a result of the declining value of the dollar in relation to other national currencies — especially true after we dumped the gold standard. It is also a result of demand for gasoline exceeding available supply.
Variation In Inflation
Inflation can fluctuate. Prices can go up and down. For example, during summer more fruits and vegetables can be grown, which results in price dropping, and in winter less fruits and vegetables can be grown, which results in price increasing. However, inflation is measured on a broad range of goods and services and the individual rise and fall of products due to market forces is not sufficient to cause an alarm. In a mature economy, these fluctuates are usually steady over a long time.
Difficulties In Measuring Inflation
Unfortunately, inflation is not always easy to understand. The result is that it is difficult to make sound economic decisions. The causes of inflation are not clearly understood because there are so many market forces at work at the same time–for example, both the housing market and the educational industry show increasing prices despite fluctuating economic conditions.
In the housing market, demand for houses exceeded the rate at which they were being built, and this caused the price of houses to go up. However, even when many new houses were built, the price of houses still continued to go up.
In American universities, colleges, and trade schools, the price of tuition has been increasing annually for no discernible reason. The quality of education, the demand for education, and the supply of learning institutions have been relatively modest in comparison to the big hike in student fees.
Inflation And Mass Human Psychology
Apart from natural inflation, artificial inflation, and everything in between, inflation is also subject to mass human psychology.
As perceptions about the value of things change, inflation is affected. Fluctuating human psychology can create waves of demand or loss of it in an economy. Sometimes speculators panic in the Stock Market and at other times mass hysteria follows a change in political direction. Previously, these collective mood changes, were not as dramatic when currency was based on the gold standard.
In those days, changes in perception could be tied to something concrete, like the price of gold coins and the amount of gold available. Nowadays, a rumor, whether well-founded or fickle, is enough to create inflationary changes in an economy.
In addition, besides changes in the national perception about value, international perceptions can affect inflation. One day, the American dollar can be equal to five francs, the next day it can be worth three francs, the fluctuation due to policy and attitudinal changes between both countries.
Why Inflation Matters
When the rate of inflation is steady, as it has been in the United States over the past 30 years, this does not affect, in any appreciable way, the purchasing power of an employees paycheck. However, when inflation rises faster than the rate of pay, people feel the crunch. This is most noticeable when the paycheck disappears entirely because the company can only stay in business by hiring less people.
In the past three months of 2009, payroll job losses in America has averaged 135,000 a month–a sign of hyperinflation. The value of a currency cannot continue to fall indefinitely. Unchecked inflation is a national crisis.
This is why you should buy gold coins — or even gold bullion. Regardless of how you get it, gold needs to be part of your portfolio. The dollar is doomed. The history of gold says to invest in gold. You can’t afford to wait.