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Inflation, What, Why, and What about me?

February 12, 2011, by Ken Jorgustin

inflation-how-will-it-effect-me

A definition of Inflation
The overall general upward price movement of goods and services in an economy. As the cost of goods and services increase, the value of a dollar is going to fall because a person won’t be able to purchase as much with that dollar as he/she previously could.

When inflation occurs, the value of a unit of currency decreases; as a result, it takes more of that currency to buy a certain product than it did a short time ago.

A definition of Hyperinflation
Ruinously high increase (50 percent or more per month) in prices due to the near total collapse of a country’s monetary system. Its roots lie in political rather than economic causes (a government chooses to print excessive money).



Why could interest rates rise?

  1. Interest rates can start to rise in order to compensate bond investors for what they perceive as risk.
  2. Interest rates can start to rise when a government chooses to print lots of money.



Perceived Risk

  • The U.S. government is currently spending $1.3 Trillion dollars more than it has coming in on an annual cash basis.
  • The current national debt is $14.1 Trillion, not counting Social Security, Medicare, and Medicare Part D.
  • American workers do not have the ability to pay down this amount of debt.

Printing Money

  • The Federal Reserve has committed to buy a fixed amount of government debt in its quantitative easing programs, now QE2.
  • The government continues extensive deficit spending, which they pay for by borrowing and printing more money, which will eventually (or quickly) dilute the value of the existing money supply – depending on how they do it.



Inflation in the 1970’s was actually called Stagflation. While inflation reached into the double digits and prices rose dramatically, workers wages mostly remained stagnant, along with the economy. Wages nearly always lag behind inflation resulting in the inability of the worker to catch up.

As Inflation rears its head again, the result may likely be Stagflation once again. Similarly, wages will likely remain stagnant due to the availability of the high number of unemployed who will work for the same or less than the currently employed. Similarly the economy remains stagnant.



What would happen to my savings during a hyper-inflationary event?
As hyper-inflation unfolds, the velocity of money increases. No money is left sitting around for long. It is immediately exchanged for tangibles, food, essentials, etc… before the price of those items ticks up in just days, hours, or minutes later.

You could leave your savings in a bank, but if it collapsed, and by the time you got your guaranteed deposit back, the purchasing power will be significantly reduced – deposits are guaranteed but interest is not and it might take months (or much longer) to get the money back.

Why could banks collapse during a hyper-inflationary event?
In a hyper-inflationary environment, any lender who has a fair number of fixed-rate mortgages out there would be almost certain to go under.

In a hyper-inflationary environment, almost no one will be able to afford, or be in a financial condition to take on a loan.

Houses will be so expensive that almost everyone will be completely locked out of the market while living costs will skyrocket.



What would happen to my mortgage?
In broad terms,

People with a traditional fixed interest rate mortgage will have their payments remain the same, and may possibly have the opportunity to pay off their loan with highly devalued dollars.

People with an adjustable interest rate mortgage will see their payment amount rise in keeping with a financial index, and at some point will most likely not be able to meet payments and will default.

If I had a fixed rate mortgage, then I’m in great shape during hyperinflation, right?
Absolutely not. Although  you may be fortunate enough to have, and leverage, new hyper-inflated cash to pay off old dollars of fixed rate debt, there will remain a very unpleasant surprise…

Property Taxes. Your property taxes will skyrocket along with inflation, as cities and towns have no other way to pay their bills except to tax you and to sell bonds. You may not be able to afford to live in your now paid-off house.

Home owners, like everyone else, will struggle to keep their jobs, as hyperinflation comes with a collapse of the broader economy.

At some point, the currency will re-set and a new currency will be introduced.

A few lucky ones will have timed their decisions right, those who had no debt, or with with a fixed rate mortgage and a little pile of gold who are quick enough to exchange the gold for cash before a dollar re-set or price-fix on gold, will make out well. But who’s to say…



What can I do to protect myself?
Really, if it were ever to come down to hyperinflation, which it hopefully never will, the more self-sufficient you are, the better your chances of getting through the chaos with the least amount of damage.

Those with no debt will do the best. Those with tangible assets and commodities will do the best. Those who have purchased and stored consumable supplies before the event, will do the best.

As the talk at the U.N. and at the IMF continues to suggest a new world reserve currency, and as China, Russia, and other nations push in favor, the U.S. dollar is at risk of losing it’s sole reserve status, which may be the very thing keeping it barely afloat at this moment.


None of this is financial advice, but only one person’s opinion.


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