Whip inflation!
Remember that old saying from the 1970s? If you don’t, you might want to say it a few times just to get used to it. It turns out prices have gone up on just about everything from oil, to food, to clothes and more. Even hotel prices spiked. Inflation is rising, too. Read more about it in an article from AP.org available over at SignOnSanDiego.com. It’s a good article filled with all sorts of depressing facts. One thing it doesn’t provide, however, is a reasonable explanation of inflation. You know what inflation is, right? It’s so funny because everyone thinks they know what it is but they really don’t.
Inflation is what happens when you add more of a thing to a supply of that thing thus driving down the value of each individual thing. All right, that’s a little confusing. Let’s take Star Wars figures, for instance. I was talking to my friend Mark recently about the new Star Wars movies and he told me how General Grievous is going to be the new badass of the Star Wars universe. He’s got four lightsabers he stole from Jedi he has killed–like Mark said–the new badass. Mark goes on to tell me how Hasbro, the toy maker that produces Star Wars action figures, is limiting production of the General Grievous figures to just a few per case. This means the value of each Grievous figure (!!) will be high because of how rare each figure is.
Now, if they were to add to the production level and produce more Grievous figures, logically the value of each individual Grievous figure goes down. This is what happens to our money. Every time a bank loans money, it’s actually creating a goodly chunk of that money from nothing since banks (I think) can loan out $10 for every $1 they take as a deposit. That makes the value of all other dollars go down. Ironically, they call this “inflation.” I guess it’s because the amount of total dollars out there is inflating, but really, there’s no substance behind it, like inflating a balloon.
Isn’t it funny how no one ever talks about it in such simple terms?
When interest rates go up, it is supposed to discourage people from taking out loans–AKA, less money will be created by the bank, thus slowing the devalueing (is that a word?) of the USD.
There are two things that make matters worse.
First, Bush 43 keeps borrowing more money from the Fed. I’ve blogged on it a bit in the past–if memory serves, Bush has upped his credit no fewer than 3 times since he moved into the White House (it might be more) which puts America’s credit limit with the Fed at $8 trillion. That’s a lot of devaluing of the dollar going on.
Now to the second thing making matters worse. In theory, our wages should be rising in rough sync with inflation–at least, that’s what is always supposed to happen so we don’t end up a country of poor people. Guess what…
It hasn’t been–in fact, our wages as a nation have actually gone down.
Now we can’t blame all of this on Bush–some of it is the system’s fault. I mean, every time a loan is given out the value of the USD goes down. That’s just financial physics. Kinda makes you wonder why we go with this system at all, doesn’t it?
Well, the people who like the system say it has been what has allowed us to have unlimited growth. If we based everything on metals, like we did before 1913, we’d have caps on our wealth. There is only so much gold and silver in the world and that would mean we could only be so rich. Creating money from nothing means that we can grow and grow and grow.
Which makes sense, I suppose.
However, I do worry that eventually, the USD will be worth so little, we’ll be the poorest country on the planet. I mean, that’s the direction financial physics of inflation is invariably going in. Loans will continue to be given out (including those to the guy in the White House) and the USD will continue to drop in value–forever.
“What about all that gold in Ft. Knox?” says you?
If there’s any gold left in Ft. Knox, it’s owned by foreign investors.
Another thing that article I linked to at the top of this post fails to do is suggest how long these price/inflation hikes and wage drops will last. My guess is that it will last quite a while. Of course, I hope I’m wrong….
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