Inflation and deflation and the dollar

Some ideas stay on the periphery for years in my mind. But slowly clarity comes. When I think about inflation and deflation I think about dollars. I don’t know why. But these terms are terms about prices, but prices of goods. It is the price of goods that either becomes greater (inflation) or lesser (deflation). Fine.

What immediately becomes complicated is that the reasons the prices of goods become greater or lesser are, well not legion but, several. For instance, take inflation. The price of goods could go up because the goods themselves are in higher demand. But why are they in higher demand? Are we running out of them because of their usefulness, because the material of which they are made is becoming scarce, because labor costs have gone up for various reasons (labor is scarce, government increases the minimum wage),or because government is printing more paper money and so they have become easier to buy which is making them move off the shelves faster. In either case price will go up.

What about deflation? Why do prices become less. Immediately one needs to think of lower demand. But demand is on-average relative to supply. Is there a glut of supply? Why? Think of mega-unemployment (ahem). It will cause a reduction in spendable cash (setting aside government stimulus) and so prices will be reduced (deflation) in order to attract buyers. But maybe a major change takes place in buying–say electric vehicles powered by nuclear fuel which would send buyers away from oil and gas.

I have always been more interested in the value of the cash. But because there is inflation one can’t immediately read anything about the value of cash. In deflation a single dollar buys more. In inflation a single dollar buys less. But why? The reasons are many.

“When I was a kid” says the old man, a Coke was $.50. My dad would have said “a nickel”. Now it is $1.25. What is happening? Is Coke scarce? No. Have wages gone up (in number yes but not necessarily in value). Have dollars become worth less? YES.

What if you became convinced that dollars were going to continue to become worth less? Would you rather keep your purchasing power in something that retained its value and was constantly traded for more dollars, or would you prefer holding the dollars while they became worth less? The answer is easy in theory, but in practice it is not always easy to transfer purchasing power back into dollars. But enter real stuff that has real value. Land, wood, metals, water, uranium, helium, gold, skill, experience, wisdom. This is the stuff that retains value.

What if you wanted an argument that told you the future was going to be like the past (continued inflation caused by the depreciation in the value of the dollar)? Here is the best meta-argument I can find. Those in debt are AVERSE TO DEFLATION. What they pay back later is worth more than what they borrow earlier. The government of the United States is in massive debt. That is the meta-argument that inflation will continue.

One of the most difficult challenges (you know this about my writing if you have spent time with me) is the internal challenge. I am an animal which means I am finite, insecure, and have tendencies of aversion to the unfamiliar. Because of our familiarity with the dollar it is hard to let go of. It is hard to trade it for metal (gold, silver, copper). Mining stocks are even more volatile (and we are averse on average to volatility).

The dollar feels stable and lasting in the short-term (years). But if you will refocus on decades you will find a radical depreciation of its value. And if you can bet on its continued depreciation you will want to trade your dollars for anything else that will stand a better chance of retaining value.

Good luck. There are no guarantees. Risk is everywhere. THINK (says Puritanical Libertarian to self)!

Published by Purilib

Anonymously interested in grasping the good life.

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