Welcome To Josh's Blog O' Thoughts: Ideas

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.

Since I missed it in January, I thought I'd go ahead and post the list of the most popular posts in 2007. So here they are:

1. Is This Hunting Or Fishing? - Contains link to a video of people bow hunting for Asian Carp. Also includes some information on the problems created by this invasive species.

2. What? Worms Are Bad For The Ground? - Information about invasive species of earthworms and how they can damage forest vegetation.

3. Pay-Per-Channel Television Service - My musings on how great it would be if cable/dish providers would allow us to choose only the channels we wanted and then charge us for just those channels.

4. Are The Sun's Rays Weaker? - Questioning the ability of the sun to burn us due to the carbon-laden air. The resulting comments are very informative.

5. Chris Dodd Might As Well Give Up - I hate to say it Chris, but I was right. You lasted little longer than 1 or 2 caucuses/primaries and what do you have to show for it? A bunch of wasted time, money, and resources. You were never a contender.

Well, there you have the top 5 of 2007. Enjoy.

Lately, with crude oil hovering near $100 a barrel and setting record highs nearly daily, I have been wondering if all of these price increases are simply due to the economic principles of supply and demand or if a large part of it is driven by assumptions that demand is higher (or going to be higher) than it really is. Or for that matter an under estimation in supply could cause the same situation. At any rate, there could be a certain amount of panic being caused that is helping drive these prices higher.

Additionally, with crude being traded on the commodities market, it wouldn't surprise me if the demand is being created simply by traders and investors rather than actual consumers. Normally, with a supply and demand situation you would expect the price to rise if consumers were demanding more of the product. However, in this situation the product passes through a middle-man first. The middle-man wants to make a profit too. People have seen that oil is on the rise. When that happens, they think "Maybe I should buy into that and make some money for myself?" They think they can buy in at $90 and sell at $100 and make a profit. This causes extra demand, not by actual consumers but by people trying to make a profit by trading oil commodities.

So, does anyone else see how this might resemble another situation in the past decade. Let's think back to the late 1990's. Tech stocks were a huge boom. Any little startup company could get funded, go public, and have their stock skyrocketing. The reason is that people had seen the successes being made in the technology sector so they didn't bother to think about real consumer demand. So you had investors buying into a lot of companies that were losing money and had no customer base. What happened? The technology bubble burst around the year 2000. Stocks across the board fell.

Now if we apply the same thinking to oil trading, we could expect to see a peak point before a bubble burst. The bubble burst will be caused by some big holders selling off or some bad news about actual demand. Once some people sell off others will follow suit and prices will fall.

Again, this is one of my things that is totally up for debate. I'm no economic wizard so this seems feasible to me. Let me know if you have other opinions.

After recycling yet another of the countless mass marketing mailings I get from the local cable company (Mediacom), I reaffirmed to myself why I don't have cable television. In my area of the world, the basic cable television costs about $40+ per month. To me, it's outrageous to pay this amount of money just to watch TV. Especially when you are paying for 5 channels that you'll watch and 70 channels that you'll just flip through. The same can be said for the dish companies although their plans are at least cheaper than our local cable.

For many people like me, the majority of the shows that are watched are on a handful of channels. For me, it's mostly the major networks. I currently get over the air reception which usually works pretty darn well depending on the station. But there are times when it would be nice to have a clearer picture. And I have also thought about how it would be nice to have a few of the cable channels (Discovery for example). But I can't bring myself to pay $40 per month compared to my current $0 per month for these small upgrades.

What I think would be ideal, is if the cable or dish companies could figure out a way to provide a-la-carte channel purchases. Basically you'd pay a monthly service fee and then you'd pay a fee for whatever channels you wanted. Some channels would be more expensive than others I'm sure. But I could then buy cable service for CBC, ABC, NBC, PBS, and Discovery. A 5 channel cable bill would have to be cheaper than the full 75 channels.

Just think of the new found sense of ownership the consumers would have if they could choose exactly what they wanted to buy. I think they'd be able to gain quite a few customers that would otherwise never think of getting "basic" cable.

And as an added benefit, maybe we'd completely eradicate some of those little-watched cable channels that are just taking up bandwidth.