Inflation

There are different types of Inflation:

 

 

Demand pull inflation is due to a rise in demand while production and supply of goods lack demand and so prices rise. As too much money is chasing too few goods, prices rise. Governments can reduce inflation by increasing interest rates, by reducing the supply of money as Russia did when the USSR broke up. They recalled money from their public and issued a new currency to replace it which was far less than the money recalled. Governments can also reduce their non-productive expenses.

 

Cost push inflation occurs due to the collective bargaining power of trade unions as they can pressurise employers to raise their salaries. When the factories raise wages they also raise the prices of their products. Interestingly, the same products are now bought at a higher price by the same people who managed to get higher wages.

 

Structural inflation is when the prices of products start going up because of the rise in price of one major product e.g. oil/petroleum products.

 

Hyper Inflation is when inflation becomes too high. Hyperinflation is not just a remote possibility. It’s becoming more likely by the day. We have only begun to print our way out of this mess, and prices are already soaring (ignore the official data; it is biased). Look at food prices, which are up 34% in the last year, according to The Economist. Something is fundamentally wrong with the system. And if history is any sort of a guide, it may take another decade or more to sort out. IMPORTANT: Rampant inflation WON’T be the end of the world BUT it is likely to mean a lower standard of living, for an extended periodThere is no easy solution to a 40+ year debt binge. The money must be paid back, and inflation is often viewed by politicians as the path of least resistance. There may be a period of market turmoil as the economy adjusts to the “new normal”. This is why it is absolutely critical to have a plan in place to preserve, even grow your family’s assets during these chaotic times. I’m not talking about just owning gold and silverbut all precious metals.

 

With Stagflation, a strange situation arises i.e along with inflation unemployment also rises. This usally occurs when the central bank keeps printing notes to fullfil their needs. Stagflation is the worst situation. The scheme, as it stands now, will not do anything to prevent a sharp economic downturn – but it might just help prevent a downturn becoming a depression. But even in the US, where there is a risk of an outright recession, a monetary over-reaction would be a serious mistake.

One reason is that monetary policy may not be as effective as regulatory and fiscal policy. For monetary policy to be able to bail out distressed borrowers would take cuts in interest rates of the order of some 200 to 300 basis points. And that would only work for those borrowers that can refinance immediately.

It is far better to bail out the distressed mortgage holders directly, if necessary through subsidies. The US has led the way, and Germany and Italy are also discussing relief plans.

Another important reason is the rise in global inflation. This is why Japan’s descent into deflation in the early 1990s offers fewer lessons than some people may think.

While it is true that in the past central banks often made the mistake of under-reacting, rather than over-reacting, this is not a generic lesson of financial crises. The early 1990s was a period of global disinflation. The Japanese asset price crash resulted in deflation and policymakers were in denial at the time.

That is surely not the case now. Global inflation is rising. Globalisation has entered a phase where it no longer just supplies us with cheap goods, but in addition creates large and rising demand for resources with supply constraints, such as oil, food and logistics. Another reason is that the period of wage deflation in western economies may also be coming to an end.