Friday, February 7, 2014

Inflation is not a boring topic. It is a thief in the night and the root cause of rebellion around the world. Can't get more exciting than that! See here why...

When I introduce the concept of  inflation in class I teach it from two angles. 

I tell students it is like a thief in the night.  It does not actually take money away from you but it makes the money in your pocket worth less (not to be confused with worthless) than it was worth yesterday.

Example:  A bottle of water costs $1.00 today.  I exchange one dollar for the water. Assume tomorrow the water is $2.00.  We certainly can say that the price has increased by a dollar, but I think it is more powerful and meaningful to say yesterdays dollar is worth half of what it was 24 hours earlier. I now have to give up two one dollar bills to get the bottle of water OR I can only buy half a bottle!

Another point I like to make is inflation creates social instability, especially for people in poorer, developing countries where a higher proportion of cash money is spent on "needs"---food, water, shelter, etc.

In many places where social instability or outright rebellion is happening if you rewind the events to the root cause it often started with rising prices on basic staples in the marketplace.

You can get students and other young people to protest in the streets for "democracy, freedom, etc" BUT you can get moms, dads and grandparents to join them if prices rise unexpectedly.  Movies are made about fights for freedom from oppression. Not so much about the real cause--loss of purchasing power due to inflation.

Do the research.  I think you will find this is true.  Look for it going forward.

Oh, wait, you don't have to!  Just read about this VERY THING here in the WSJ:
Inflation may lead to social unrest in developing countries because rising prices are especially painful for households that rely heavily on cash as a store of wealth, according to recent research from the Federal Reserve Bank of St. Louis. 
Yi Wen, an assistant vice president in the St. Louis Fed’s research division, wrote in a new working paper that in developing nations, “liquid money [cash and checking accounts] is the major form of household financial wealth and a vital tool of self-insurance [precautionary saving] to buffer idiosyncratic shocks because of the lack of the well-developed financial system.” 
Mr. Wen also noted “historical evidence” that “moderate inflation [around 10% to 20% a year] may be significant enough to cause widespread social and political unrest in developing countries.

5 comments:

  1. I certainly don't consider inflation in the 10 to 20% range to be moderate.

    During the brief period when we had 10+ plus inflation in the U.S. we also received regular cost of living adjustments in our pay checks, so we didn't fall so badly behind.

    But I think you are being simplistic. First off, it seems that some moderate level of inflation - maybe 2 to 5 percent - is a natural resultant of a vibrant, growing economy. Contrast our current situation, low inflation and a blah economy. Zero inflation is an economic dead zone.

    Again, contrast the 70's - the problem with inflation, per se, occurs if wages don't keep up. This isn't an inflation problem, it's a distribution problem. Now, here we are with the lowest inflation in half a century, and the economy is in the doldrums, while corporations are making record profits. And, even with low inflation, working class wages are not keeping up.

    http://research.stlouisfed.org/fred2/graph/?g=s2T

    At the same time, real median income is falling because nominal income is going nowhere, and inflation, though slight, is still positive.

    http://angrybearblog.com/2013/10/different-views-of-real-median-household-income-and-recessions.html

    Back in the 60's that was not the case. FRED median income series only goes back to 1984. Here's growth in real disposable income. Robust in the 60's, now hovering near 0.

    http://research.stlouisfed.org/fred2/graph/?g=s2V

    And remember, that's the median. Half the population is doing worse.

    Inflation can be a problem, but it's not always a problem, and right now, it's not THE problem.

    Cheers!
    JzB

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    Replies
    1. Jazzbumpa,

      Thank you for the comment. I appreciate it. I am introducing the concept to high school students so the example of inflation in developing (or even relatively developed) nations like Venezuela and Argentina of late are ones that get their attention.

      The LACK of overall inflation in the US makes teaching the concept and its ramifications difficult, which in the big picture is a good thing. Inflation to them are gas prices and the pending college tuition.

      However, your points (and links) are well taken and are a part of our discussion(s). Students for the most part believe the Fed is "printing money" and inflation is around the corner. This is a VERY difficult nut to crack with young people who get their news for shallow sources, for the most part. It is yeoman's work to de-bunk. :)

      Again, thanks for the comment. My students see it and it helps them to other points of view.

      Delete
  2. Jazz -- I paid TWO DOLLARS for a candy bar this morning. I know, I know, we don't call it inflation.

    "Inflation can be a problem, but it's not always a problem, and right now, it's not THE problem."

    Inflation is one of a set of things that can happen in an economy. Therefore, it must ALWAYS be included in the analysis. To dismiss inflation because it is not 10+ is careless and crude.

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    Replies
    1. Hey! Are you guys making fun of my bottle water example!!!!! (LOL!! Good natured sarcasism intended). :)

      One cannot be too simplistic when trying to explain abstract concepts even the economics profession cannot explain for the most part.

      When I was in high school I spent most of my time trying to figure our where the restrooms were. :)

      I appreciate both you guys. Through Arts Blog you have elevated my understanding of various policies.

      For that I am grateful.

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  3. The prices of gasoline and tuition are components of inflation. Gasoline prices have been in a very uneven decline for almost 3 years - longer than your students have been driving.

    http://www.GasBuddy.com/gb_retail_price_chart.aspx?city1=USA Average&city2=&city3=&crude=n&tme=120&units=us

    College tuitions have been increasing too fast for too long, and are not representative of the general economy.

    Art - I don't buy many candy bars, so I don't know what to make of that item. But - I never said anything about dismissing inflation. Still, though you're aware of floods, it's not what your short term policies should be addressing during a drought.

    I'll say again, the major problem in the U.S.economy is skewed income/wealth distribution. It's been building for 4 decades and has gotten much worse in this century, and most particularly since the recession depth of 2009.

    With the wealth/income distribution of the 60's, we wouldn't have an aggregate demand shortfall, median wages would likely be growing faster than inflation, and the economy would be expanding.

    Cheers!
    JzB

    ReplyDelete