You know how your parents always tell you about how cheap things were when they were kids? Well it’s true, prices for literally everything have risen dramatically over the decades. Why? Because of something called inflation. What exactly is inflation? Why does it happen? Is it good or bad? What about deflation, what’s that? Let’s dig into the details!
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Inflation and Deflation: Understanding the Economic Phenomena
Inflation and deflation are two economic phenomena that can have a significant impact on our daily lives, yet they are often misunderstood. These terms refer to the rise and fall in the general price level of goods and services in an economy. Let’s delve deeper into these concepts to grasp their effects on individuals, businesses, and the overall economy.
Inflation is defined as the sustained increase in the price of goods and services over a specific period. It erodes the purchasing power of money, meaning that the same amount of money can buy fewer goods than before. Inflation can occur for various reasons, such as an increase in the money supply, rising demand, or supply shortages.
One major consequence of inflation is that it decreases the value of savings. If prices rise faster than the interest earned on savings, individuals will find it harder to maintain their purchasing power. Similarly, fixed-income retirees are adversely affected, as their pensions or savings may not keep up with the rising cost of living.
On the other side of the coin, inflation can provide some benefits. It incentivizes spending and investment since holding onto cash becomes less attractive. Businesses can increase prices and generate higher profits, encouraging them to expand and create more jobs. Moreover, when inflation is moderate, it can encourage borrowing and investment in real assets such as property or stocks, leading to economic growth.
Deflation, in contrast, denotes a sustained decrease in the general price level of goods and services. It is often caused by a contraction in demand, excess supply, or technological advancements that lower production costs. While deflation might sound appealing as it increases the purchasing power of money, it can have adverse effects on the economy.
One of the most significant concerns with deflation is the potential for a deflationary spiral. When prices fall, consumers may delay purchases in anticipation of further price reductions. This, in turn, leads to lower sales for businesses, prompting them to cut production and lay off workers. The resulting decrease in consumer spending further drives down prices, leading to a vicious cycle that can precipitate a recession or depression.
Furthermore, deflation can also increase the burden of debt. As the value of money increases, loans become more expensive in real terms, making it harder for borrowers to repay their debts. This situation can lead to a decrease in investment as businesses struggle to access credit, which hampers economic growth and job creation.
Both inflation and deflation can have profound effects on an economy, making their management crucial for policymakers. Central banks and governments employ various tools and policies to maintain stable price levels. For example, to combat inflation, central banks may increase interest rates to reduce borrowing and spending. Alternatively, during periods of deflation or low inflation, central banks may reduce interest rates and implement quantitative easing, injecting money into the economy to stimulate spending.
Understanding inflation and deflation allows individuals and businesses to plan their finances effectively. By monitoring the general price level and adapting their strategies accordingly, individuals can reduce the impact of inflation on their savings and investments. Likewise, businesses can adjust their pricing and production strategies to mitigate the effects of deflation or capitalize on inflationary periods.
In conclusion, inflation and deflation are economic phenomena that impact the purchasing power of money and overall economic stability. While inflation erodes the value of money, deflation can lead to economic contraction and debt burdens. By implementing appropriate policies, governments and central banks aim to maintain stable price levels, benefiting individuals and businesses alike. Therefore, staying informed about inflation and deflation can empower individuals to make informed financial decisions and adapt to changing economic landscapes continuously.
I hate how the definition of "inflation" has been changed from describing an increase in the money supply to an increase in prices more generally. The second is merely a symptom of the first.
The fourth cause of inflation was missing:
4. Producers raise prices to increase profits because they can. This is most likely in a semi-monopolistic industry, which the US has in media, agriculture, animal agriculture, transportation, banking, consumer credit, technology, …
Nice video Prof. I'm curious about the FED's triple QE 1-3 increase over the last few years in comparison to the "healthy inflation" that you mention here for an ecomony. Would love to hear your take. Cheers
Do we "need" inflation? What if we had money with a fixed supply that could not be produced or printed by governments? In that cause in which the money supply was fixed and production in an economy increased, wouldn't purchasing power increase over time?
He didn't really talk about the causes of deflation.
I wish I had you as my teacher in school 😐
It sounds a lot like we want inflation and we don't want deflation simply because investors are too stupid to understand that prices going down doesn't reduce the value of their investment because even if the numbers of dollars they earn is slightly reduced, those dollars will be worth more.
I find it ridiculous that we're locked into permanent inflation as a policy because "big number good, small number bad!"
So most of inflation is maintaining corporate profits for shareholders and lifestyle creeps at the expense of the worker
Wait… Is number 2 the reason we can't have nice things?
Best explanation on the internet.
Inflation is not inevitable. Before the federal reserve we had deflation, which was a good thing, because prices decreased as technology improved.
Is Inflation caused by Greed?
I hate how our system seems to b constructed as such that when the working class does well it causes inflation. However if the owner class does well they just expand and pocket the rest. And that would be fine if it drove us all forward at an even rate. But they pocket so very very much. And that gap keeps growing.
I'm a fan of Prof Dave, AND a fan of Mr. Beat!!! so this is basically both
inflation is theft!
What can you say about gold standard?
Shit kinda confusing. Inflation is good because it makes it appear that prices are going up. Meanwhile wages stay relatively the same. So you actually don't get more you get less. Deflation is bad because it appears prices are going down while purchasing power goes up. But due to the lowering of prices it creates fear. This really doesn't make sense to me. If we have deflation domestic good will lower equally thus profit margins should stay the same if goods are beings produced here with domestic materials. But if they aren't don't we benefit more because the dollar is worth more. So we can buy foreign materials a lot cheaper and produce good at a lower cost? Thus increasingly profit margins? Or is inflation and deflation just a representation of the economy. Inflation means greater price growth while deflation mean a decrease in price. It's not about how much your money is worth at all? Idk man I don't get it lol
id argue deflation is actually a good thing. At least better than inflation. Adaptations could be made to deflation just as they could inflation.
I disagree with many things in this video. We don't need inflation. Gold standard works a lot better than current inflationary monetary policies.
why do we need investment and economics growth? the planet can't survive if we are always growing…. promote sustainable living..no need to work for ever to keep up with 'good inflation ' you can see that with inflation the rich get richer.. with deflation… you only produce what is really needed in the society…
Great explanation. will be glad if you make more emphasis on deflation on its own.
Some difficulties with the CPI is that it is often manipulated, e.g. milk subsidies can keep milk prices low and artificially deflate the CPI. There is also the 4th cause of inflation, the expectation of inflation. This 4th cause is what is allowing companies to currently get away with large price increases that are not commensurate with their cost increase (3), nor with supply (1) or demand (2). This data is public via their earnings calls in which they must communicate honestly with their investors. So many companies have been using the pubic expectation of increased demand and short supply, and thus the public expectation of inflation, in order to excuse large pricing increases and reap record profits. I'm not saying there has been 0 real inflation, but that a good chunk of it has been artificial as prices have been raised voluntarily by companies profiteering well beyond their cost increases, in other words, they are increasing not just their price, but their profit margins.
Consider GPUs. Supposedly they're scarce, and yet I can hop on eBay and get one from a scalper today. They don't seem to be scarce, they're readily available even from no-name companies and individuals. Their production has not slowed in any major way. TSMC reports no scarcity, but they did report that some of their customers downstream of them in the supply chain are hording chips, and so that they would be giving less supply to those companies going forward and more to those that were actually shipping downstream. The myth of GPU scarcity has driven scarcity in retail locations as scalpers snap them up in the hopes of profiteering. At the same time, there has been a proliferation of "system builders" offering prebuilt computers with these same GPUs, some of which are only a few hundred more than buying the GPU all by itself. Clearly they are getting a large number of GPUs at prices far lower than what we see with the scalpers or their business model wouldn't be feasible, aka they're also depleting retail shelves in the hopes of profiteering just like the scalpers.
Have there been supply issues? Yes, but they have been far more minor than the scalpers would have us believe. There have been enough GPUs available, just not to such excess that they could absorb the additional pressures of the profiteer demand in the middle. It's like this: there are 10 GPUs and 10 people, if everyone buys one, then everything is fine. But 1 person bought 8 of them and is now charging double MSRP… It's not that there aren't enough GPUs, it's that there isn't a huge excess to flood the market and keep the price low. That is, e.g. if there were 100 GPUs and 10 people and the scalper could still only afford 8, then he can't corner the market and the price stays low.
Is there a demand issue? There was some at first while tons of people were home with nothing to do because of COVID, but most people are back to work now. And while demand was high, it hasn't been so high that GPUs were ever unavailable. There has not been a single day where one couldn't find a 3080 on eBay at a silly price that people were not willing to pay.
Have there been increased cost issues? Not much, Nvidia and AMD have NOT increased MSRP and costs to retailers for their shipments seem to have been stable. So we can only conclude that the illusion of scarcity is driving high costs moreso than actual scarcity, with even the big players like Best Buy now coming up with inventive ways to stiff customers as stock approaches market flooding levels by requiring special account status in order to buy the cards being sold at MSRP (an account status that costs like an extra 200? bucks or so).
thanks.
0213
sounds the same as investment
Inflation is actually supply and demand
The more money you print, the more supply it has, if the demand doesn't increase either then the value of money decreases and you have inflation right there
Oh okay… that's why my 3 dollar bag of chips costs 8 dollars now.
Japan can def tell you that inflation is a good thing
Economics, since first lease-agreement to mine early coal in Britain, sealed ignoring the stuff is finite – has become not a closed system.
Not-a-closed-system means it is no other than Communism disguised Capitalism.
What humans have been living since the 1700s' James Watt – is the best of Communism:
Starting with a rosy promise and ending a Gulag.
Fossil fuels, traded not on the basis they are finite – as if looted – have transitioned the world, since Adam Smith, from Feudalism straight into Communism.
There is no such thing called Capitalism.
"Energy, like time, flows from past to future".
Wailing.
1. the government spends more than it raises in taxes, thus needs to go into debt which artificially puts more money into circulation, and causes the money to lose value, therefore, by not properly taxing for their spending, the government essentially creates a hidden fixed-rate tax (which tends to hit poorer people disproportionally hard, compared to progressive tax rates which put the higher burden on the rich who are more capable of handling it). What political parties tend to want to reduce taxes (even though they don't necessarily spend less)? More capitalist parties, of course, because they have the interest of rich capitalists at heart.
2. the amount of money everyone has goes up, and the rich capitalists exploit it by asking more money, for products their companies produce, thus increasing their own wealth, whilst keeping the rest of us down and unable to ever climb up the economic ladder unless we manage to pull others down and/or step on other's heads
3. Costs go up, and the rich capitalists don't want to reduce their millions of profits by a couple thousands, so instead they raise the prices of their products so they can keep getting richer whilst keeping the rest of us down.
Our economies grow, but the rich are the only ones who truly benefit from it, the rest of us just exist to do the work and buy the products of our own labour, which makes the rich even richer.