The Inflation Nation of the Next Generation

Author: S Porter
Date: Jun 12, 2009 - 2:12:31 AM

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Most people don’t think about inflation and don’t have any idea how it affects our lives, but the implications are very real.   Inflation is the process by which all the goods and services that we purchase become higher in price.   If inflation goes up at a faster rate than wages, more money is leaving your wallet to buy all the things you need than your income can keep up with.   There are three reasons why inflation goes up and we usually have only one of them at a time, but right now there is a perfect storm brewing that may seriously hurt us all.   Knowing what causes inflation and what to expect can help us prepare for the inevitable.

The first reason for inflation is debt.   When the United States needs to borrow money from another country like China, the value of our dollar goes down compared to their currency.   We buy many things from China and lots of the things we make and use are built with Chinese parts.   If the dollar is worth less in China, then all the things we buy from them go up in price and all of the things we make with Chinese parts go up in price as well.   We have been borrowing money from China for many years, but right now we are about to borrow huge amounts of money all at once.

The second reason for inflation is printing more money.   It is the most dangerous and it is the next step in paying for our huge government spending spree.   Many people think that if the government needs more money they can just print it, but this is a huge mistake and only used as a last resort.   The country’s total production has a particular value and it is divided up amongst all the currency that is in circulation.   When you print more money, you don’t have more money; you have the same value divided up amongst more currency so it all goes down in value.   This makes the cost of everything go up even though your wages aren’t, and when we print more money the cost goes up almost instantly.

The third reason for inflation is the most common and happens on a regular basis when the economy is recovering and going up.   When the economy is going down or crashes like it did recently, manufacturers quickly cut production to meet the lower demand.   As the economy recovers, people have more money to spend; but there aren’t enough products to meet the demand.   This makes the value of those products go up because they are more valuable.   If you want to buy a new car, and so does everyone else, the value of the car goes up because they aren’t making enough cars to meet the new needs.  We usually keep this kind of inflation in check by raising the interest rate to borrow money; this slows people’s spending down and the rate of inflation slows down as well.

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