What is Cause and Effect of Inflation and Deflation and how to understand?
In 2011, America’s debt was nearing 100% of the entire annual value of all of the “Gross Domestic Product”, GDP — approximately the value of everything produced in one year in the U.S.A. economy. The Federal government is taking in about 15% of GDP in taxes, but its spending 20-25% of the GDP, which is well above what the government collects in taxes.
Inflation is partly caused by that overspending called the “national or Federal deficit”, called red ink and deficit spending. It is the difference between federal government spending and how much it collects in one year (when overspending) — if the government “collects” $2 trillion in taxes in one year, but spends $3 trillion, that’s a deficit of $1 trillion. In order to pay the difference, the government has been borrowing money from Americans/citizens, foreign countries and their citizens, and other sources (in the form of U.S. Bonds and Treasury Notes and loaning money to banks/printing money called “quantitative easing”).
Watch your home value, which may begin sinking (deflation of home values).
Millions of Americans have their life-savings sunk/invested in their homes, and the average prices of homes may boom temporarily and/or head downward (deflating) and seem to show weakness as some areas of the economy recover more than others. A popped bubble may not always re-inflate (recover higher prices) in a short period of time; instead it may take years to get home prices rising near or surpassing previous highs.
• Credit is often tight for home-buyers, consumer buying and business investors when there is deficit spending by government. Average/Middle-class payroll checks, salaries and wages are not rising much, and “under-employment” is common which is when people become employed below their previously better pay-rate standing.
2. Work on how you can economize rising household and business utilities —
As the suppliers “pass-on” the cost of inflation to the individual who then faces higher prices for energy and other utilities.
Consider that you individually cannot control inflation, but perhaps you can try to manage the costs of household utilities (including water, garbage and sewer) that are related to energy costs as well.
3. Define deflation — the lowering of dollar values.
Deflation (sliding dollar value) would likely increase to stay even with inflation of money supply, as the cost rises, for instance, to buy each barrel of oil or other products. To offset inflation, the oil-producers can raise prices, in turn causing lower dollar values (deflation).
4. Look for your best ways to cut fuel usage:
To be economical and get better fuel economy on gasoline, oil and natural gas prices. A surge in oil prices could damage prospects for recovery that may be trying to take root in the current economy.
5. Examine inflation caused partly by The U.S.
Federal Reserve Board (The Fed) printing “extra” money to put it into circulation by loaning it to weak banks to encourage expanding these banks’ loans to businesses and for individual (consumer) credit including for home loans to Fannie and Freddie which are government agencies that guarantee and buy U.S. home mortgage loans.
• Printing more and more dollars would be called “monetizing” the debt. This suggests higher inflation and evidently increases economic weakness. The Fed prints more money than it shreds and replaces.
• But, the creditors would then get paid back with money of less value, so some favor that idea.
6. Try to remain employed (perhaps move or change industries) and improve marketable skills and apply knowledge (unused it’s equivalent to waste).
Get training (as much as possible) to improve value and income. In the U.S., unemployment was around 9.4 percent for about 2 years, and combined with “under”-employment (working for lower pay) and “discouraged” job seekers are at high levels above 15%.
7. Realize that failing economies anywhere could set economies falling around the world.
This economist said that not only U.S. citizens but Europeans face “another serious crisis in early 2011,” with huge short-term debts and many nation-states needing huge bailouts.
• To help the business and markets, “Confidence is key,” said Mark Zandi, chief economist of Moody’s Analytics. “If people don’t feel good the economy just isn’t going to gain traction so it’s very and very important that people start to feel better about things because until we do the economy is going to struggle.”
8. See state and local governments at the brink of bankruptcy:
As State and local governments needed Federal stimulus money in 2009 and 2010 — depending on the Federal level for bail-outs which is itself in trouble — including such states as: California, Illinois and New York State to be bailed out by the U.S. taxpayers (government), by The Fed printing money (monetizing debt/inflating) and loans from abroad, but then have to pay it back which drains all those coffers further.
9. Consider buying gold and government guaranteed investments, because of the weak U.S. Dollar and weak Euro;
Many people say that such things are good investments that have residual value.
10. See some perspective on Inflation, historically, a rate of 3% may be called “creeping-inflation”
There is sometimes higher inflation that may be around 10% or even more with booms and bursts, typically. In about 10 to 20 years prices may double, triple, or more.
• In the early 21st century, a dollar may be said to be worth around “5 to 10 cents” compared to around a 1960 approximate value of the dollar (depending on the product category), for example: a new auto which might have cost around $2500 would now be about $25,000 or so (that’s the 10 cent dollar).
• But, a cup of coffee at a shop then was 5 or 10 cents and in 2011 is now $1 or $2 in the U.S.A. and that shows that the dollar is, perhaps, worth about 5 cents, in that category.
• Computers are counter-example (outlier) because of great economies and improvements in products that had the original low speed processors costing about $2000 to $3000 dollars in the early 1980s and the hard drives were very small, but very expensive — and they actually came down in price with vastly improved speed and capacity. Today’s desktop computer is much faster than the “business mainframe computers” of that era.