A question came to me the other day, as often they do, and I thought it interesting so I've decided to share it with you. First for some background.
Up until the end of this summer, there were concerns of rampant inflation in the US economy. The cost of nearly everything (fuel, commodities, food, retail) everything was on the rise. Generally speaking, the term inflation strikes fear in the heart of people. It generally is considered a bad thing because a dollar will no longer buy the same amount of goods as it would have before the inflation. However, there is a general consensus that some amount of inflation is a good thing, and that it is problematic when we have rapid bursts of high inflation.
In terms of money availability, inflation means that there is more currency circulating than there used to be. This dilutes the value of that currency. If it used to cost $1.00 for a loaf of bread, it now costs $1.20.
In a domestic-only economy, higher prices would mean higher revenues for the businesses that sell these products. With the higher revenues it is likely that employee wages will increase so that the company can retain good employees and stay competitive in the market. So, although prices of goods are going up, wages are increasing too. In a domestic-only economy, there would be a greater chance that prices and wages would increase relative to each other so that the products one buys still cost the same proportionally to their income.
Inflation really becomes a problem once you start to examine a global economy. If our country has rapid inflation, our currency will be devalued against the other foreign currencies. So for example, maybe $1 used to get you 1 Euro but now it takes $1.50 to get 1 Euro. That means we would be paying more for products that we import from other countries. In the domestic-only economy, the rise in prices is countered by the rise in income, but in a global economy that does not happen. The increased prices are all going toward monetary exchanges and not revenue for a domestic company thus there is no corresponding increase in wages.
Since the US deals in a global economy, it is apparent that inflation is something that could truly hurt us. Our dollar needs to remain strong versus foreign currencies or we hurt our economy.
So the question that occurred to me the other day was whether or not there were ways that rapid inflation could actually help the average person.
Of course, if you were making investments in currency against the US dollar you could make some money. But the average person does not have the understanding or funds to make this a reality.
Inflation certainly doesn't help your savings or idle money. If you have money in savings accounts, which typically come with fairly low rates of return, inflation will dilute your money faster than it can grow.
If inflation is also inflating your income, then it is a good thing for any fixed-rate debt that you might have. This would commonly be a home mortgage. If you have a 30 year loan with a fixed interest rate, then your monthly payment will never change. So if your monthly payment on day one is $1000 and your salary is $40,000, your monthly payment stays $1000 even when inflation increases your salary to $60,000. That is very helpful. Unfortunately, if we are currently in a rapid burst of inflation in which costs rise disproportionately to income, then this is no help.
What about people who invest their money in physical goods like art or other collectibles? These people might feel they are making a lot of money because their investment rapidly increases in value with inflation. However, they really are only making money at the same rate as inflation. While this is probably better than leaving your money sitting in a low yield savings account, you really aren't making any money, relative to the costs of everything else.
What about stocks? Stocks are a better way to keep your investments on par with inflation. And if lots of people understand this, the new demand for stocks will also increase their value above inflationary increases thus actually making you some money. But that's only assuming that there is a higher level of demand for stocks. However, the reverse may be true because with the increase of costs, people will have less extra cash to invest. So stocks could see a possible benefit, but only if demand increases as well.
So is there any single thing that can be good about rapid bursts of inflation? Is there any way inflation can help the average person make some money or reduce debt? While a modest amount of inflation is a good thing, right now, I'm not seeing any silver lining in rapid inflation. I'll keep thinking though, and if I come up with something I'll be sure to let you know. If you have any ideas, drop a comment.
Here's a couple shots of a butterfly I took this past summer at Inspiration Peak near Alexandria, MN. I just happened to get lucky that this butterfly landed on the clover right next to me and stayed long enough for me to take some good shots. As a side note, if you ever are in the Alexandria area, I highly recommend taking a couple hours and hiking up Inspiration Peak. Nice little place for nature and scenery.
These shots were taken on my Canon Rebel XT (350D) with a Sigma 70-300mm telephoto lens set at 300mm macro mode. Other technical information should be in the file properties. Click the links below for medium resolution images (I won't be hosting the original 8MP images on this site).
I hereby donate these files to the public domain so feel free to use them in any way you wish.
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