Inflation and Deflation and How It Affects Us

Inflation occurs when prices rise due to more currency chasing after the same amount of goods and services. This happens when the government decides to print more money out of thin air to pay its debts. Now the government is printing money at a rate never before seen in history with the bailout of the economy, rewarding the same unethical overleveraged companies that caused the crisis. We are looking at trillions of dollars in money made out of thin air by the US government - trillions more chasing after the same goods and service.

When inflation hits your money in the bank loses value because it has less purchasing power. It takes more money to buy things. Governments tend to lean towards inflation as opposed to deflation as the lesser of the 2 evils, so some level on inflation is a constant in normal economic times. With inflation savers become losers as their hard-earned dollares lose value when the governments prints more money (Or just ads 0s with a computer.)

Deflation is when the economy grinds to a hault and in a desperate attempt to make sales producers lower prices on goods and services. As people spend less with an economic crisis it becomes a vicious cycle of less consumption, lowering prices, job loss, etc. Inflation is generally considered the lesser of the 2 evils between inflation and deflation.

As I mentioned, with inflation saving in currencies (dollars, euros etc.) is bad because your money loses value. You always want to think in terms of value as opposed to money. You think about what will hold the most value.

If we have a lot of inflation now it will benefit us because the cost to pay back the loans on our properties will go down, it will be somewhat ‘inflated’ away and as things will become more expensive we can raise the rents. It will also hurt us less because we have little money in the bank in savings.

In general, having debt is good in times of inflation, that’s why the US government loves to print money when it has debts to pay, it devaluates the debts. Of course, people who own or have reserves in US dollars aren’t too happy to see there store of ‘value’ (US dollars) become devalued.

In times of deflation having savings in the bank is good. That is when as they say ‘Cash is King’ because your money gains in value and having assets with debt on them like real estate is not so good as your debt increases.

With the current economic crisis and susequent bailout no one seems to be decided on whether or not we are entering a period of deflation, inflation or one after the other. Assets like real estate and stocks have lost a lot of value causing deflation. Nevertheless, the US government (as well as some other countries) seems to be decided on printing more and more money to do whatever it takes to keep the economy going.

Since it seems that the government will keep inflating to prevent a slowdown I’m leaning towards eventual mass-inflation. We’ve started buying silver bullion and silver (SLV) ETFs to hedge and hopefully profit against the possible inflation.

I’m not a financial analyst so don’t listen to me on what to expect, and from what I’ve learned so far about finances, most analysts don’t have much of a clue either. One says one thing, another says the opposite, sometimes they’re right and sometimes they’re wrong. (Usually wrong more than right.)