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Inflation on the horizon
Apr. 6th, 2009 03:18 pmJubak explains why some big increases in inflation may be on the horizon.
My understanding of it is that to pay down the large deficits which all the bailouts are running up, the easiest path is for the U.S. Treasury to print more money, resulting in a weaker dollar which increases inflation (as each dollar buys less, prices go up). Jubak goes into detail how this helps pay off government debt faster. You can understand why countries which are holding a lot of dollars, like the Chinese, are none too pleased at the prospect of their holdings becoming worth much less than what they purchased them for, hence their drive to find an alternative to the dollar as the global currency.
For the everyday U.S. citizen, workers who have cost-of-living increases will sail along OK, though normally the COL adjustments are usually behind the curve and not equal to inflation. The hardest hit will be the unemployed and those on fixed incomes, assuming their benefits aren't adjusted as well, since prices for everything will be going up considerably. On the plus side, paying off fixed-term credit and loans/mortgages will be easier, since we'll have more dollars to pay down the amounts with, but we can expect variable loan interest rates on things like credit cards to rise concurrently. This also means that if you're considering something like refinancing your mortgage or consolidating student loans, now is probably the time to do it. Ditto with taking a trip overseas (or buying foreign goods), since a weak dollar will mean a much less favorable exchange rate.
This is how James Fallows put it:
My understanding of it is that to pay down the large deficits which all the bailouts are running up, the easiest path is for the U.S. Treasury to print more money, resulting in a weaker dollar which increases inflation (as each dollar buys less, prices go up). Jubak goes into detail how this helps pay off government debt faster. You can understand why countries which are holding a lot of dollars, like the Chinese, are none too pleased at the prospect of their holdings becoming worth much less than what they purchased them for, hence their drive to find an alternative to the dollar as the global currency.
For the everyday U.S. citizen, workers who have cost-of-living increases will sail along OK, though normally the COL adjustments are usually behind the curve and not equal to inflation. The hardest hit will be the unemployed and those on fixed incomes, assuming their benefits aren't adjusted as well, since prices for everything will be going up considerably. On the plus side, paying off fixed-term credit and loans/mortgages will be easier, since we'll have more dollars to pay down the amounts with, but we can expect variable loan interest rates on things like credit cards to rise concurrently. This also means that if you're considering something like refinancing your mortgage or consolidating student loans, now is probably the time to do it. Ditto with taking a trip overseas (or buying foreign goods), since a weak dollar will mean a much less favorable exchange rate.
This is how James Fallows put it:
When the dollar is strong, the following (good) things happen: the price of food, fuel, imports, manufactured goods, and just about everything else (vacations in Europe!) goes down. The value of the stock market, real estate, and just about all other American assets goes up. Interest rates go down—for mortgage loans, credit-card debt, and commercial borrowing. Tax rates can be lower, since foreign lenders hold down the cost of financing the national debt. The only problem is that American-made goods become more expensive for foreigners, so the country’s exports are hurt.
When the dollar is weak, the following (bad) things happen: the price of food, fuel, imports, and so on (no more vacations in Europe) goes up. The value of the stock market, real estate, and just about all other American assets goes down. Interest rates are higher. Tax rates can be higher, to cover the increased cost of financing the national debt. The only benefit is that American-made goods become cheaper for foreigners, which helps create new jobs and can raise the value of export-oriented American firms (winemakers in California, producers of medical devices in New England).
