What The World Needs Now Is Real Inflation! Submitted by: Fx Addicts
(OPENPRESS) July 14, 2011 -- Inflation spun by politicians is the great "boogie man" of economics. Bond investors loath it as inflation reduces real returns. Central bankers detest it because if it shows up they are blamed and the politicians control central bankers' employment. The general public hates it because they have been told repeatedly it is bad and because in situations of hyper-inflation spending power is substantially reduced.
Hyperinflation, inflation of 50%, 100% or 1,000% per year, is certainly bad for everyone. It fuels itself as people purchase more items today in the anticipation of higher prices tomorrow.
Deflation, the opposite of hyper-inflation, is when inflation is negative. For instance the Producer Price Index and/or the Consumer Price Index is below zero. However, here is one thought for consideration. If these indices are only 1% or 2% then this means that while some prices are increasing many are also decreasing. That's a good thing, correct?
It can be if economic growth is robust. If not, low inflation can make low growth even worse.
Inflation is measured two ways; the prices of all goods and services and the prices of all goods and services excluding food and energy or core inflation. Food and energy prices are subject to price swings due to weather, political influences, civil unrest and a host of other forces. Prices for food and energy go up because of these forces and then when the crisis is over they come down. Thus, it is not "real" inflation.
Real inflation of 4% to 5% is not food and energy price increases, or anticipation of tomorrow's price increases - hyper-inflation, or price increases less than 2%, but real inflation that would raise prices for core products and services a minimum of 4%. Right now, in a low growth environment, an inflation rate of 4% would provide companies more revenues that would directly increase profits. It would provide the where-with-all to grow their business and more importantly hire more employees.
Some may call this stagflation, and in all technical terms it could be stagflation; although the current situation would also have to be called stagflation as we have very little growth and an inflation rate of 2%. Stagflation, like that experienced in the U.S. during 1970's, was an inflation rate over 10% and growth below the inflation rate; true stagflation.
Inflation can be controlled, deflation cannot. Stagflation is unstable and will either become a robust economy with high inflation or a busted economy with low growth and low inflation.
Ideally, right now in the world, an inflation rate of 4% with a growth rate of 5% would go a long way to aid financial issues. Within a couple of years the global economy would be humming a self-sustaining recovery that would be unstoppable. All efforts globally should be focused on working towards this goal. Simply printing cash and having zero interest rates does nothing unless that money gets into the hands of people that will spend it, recycle it. Econ 101, the velocity of money creates inflation, not the simple printing of cash. Cash lying around has no value, get it to change hands often and then it will really produce growth and inflation. Put the cash into the hands of those who need it most, they will spend it creating inflation and the World economy will be fixed in 12 to 18 months.
About the author:
Tim LuCarelli is Chief Analyst at Fx Addicts. He has traded currencies for over 20 years and has published several newsletters and written many articles on economics, interest rates and currencies. He can be reached at firstname.lastname@example.org