The cause and effect are both commonly called "inflation" which can cause some confusion. Typically, "Inflation" is defined as "an increase in the cost of a basket of goods over time". Technically this should be called "Price Inflation" which is often the result of "Monetary Inflation". As we have discussed in "What is Inflation", monetary inflation can also be referred to simply as "inflation." Inflation is a common phenomenon that affects millions of households every year. Let's look at how it affects various types of individuals. Inflation and Income A fixed income combined with rising prices decreases the ability of people to purchase the same number of goods. As inflation … [Read more...]
April Inflation Near Zero
The U.S. Bureau of Labor Statistics (BLS) released its April Inflation report on May 12th, 2020, for the 12 months through the end of April 2020. Annual Inflation Down Sharply... Again! Inflation fell sharply to 0.33% in April from 1.54% in March, 2.33% in February and 2.49% in January. CPI Index in 258.115 in March fell to 256.389 in April. Monthly Inflation for April was -0.67%, March was -0.22%, February was 0.27% typically January through May are highly inflationary so this is VERY unusual. The FED has massively cranked up the "printing presses" using "Quantitative Easing" in an effort to stimulate the economy in the wake of COVID-19. FED Funds Rate down to near … [Read more...]
What Causes Inflation? Rising Prices Explained
Economists say that there are 3 major causes of inflation. They are: Cost-Push Inflation Demand-Pull Inflation An increase in the Money Supply https://youtu.be/UMAELCrJxt0 What is Cost-Push inflation? As the cost of raw materials or wages increases it causes producers to be forced to increase the cost of their products in order to be able to cover their costs of production and a reasonable profit. This results in a “snowball effect” as these new products raise the prices of other products. But that leads us to the “chicken or the egg” question. What caused the cost of raw materials or wages to rise in the first place? It is possible for foodstuffs to be in short supply due … [Read more...]
The 2008 Financial Crisis
Approximately every 50 to 80 years the world experiences an economic meltdown of catastrophic proportions. The one most people think of is the “Great Depression” of the 1930s. But the more recent example is the 2008 Financial Crisis. This crisis had the potential to be as bad as the Great Depression but Government action i.e. Unemployment Insurance and massive liquidity pumping was able to mitigate the effects somewhat. However, even with those actions, U-3 unemployment reached 10.6% and U-6 unemployment which is more like the measurement used in the 1930s reached 18%. What Caused the 2008 Crisis? The 2008 crisis is the culmination of a series of missteps and failed legislation. … [Read more...]
What are Central Banks?
History of Central Banking Like everyone, kings like to spend money, whether it is to wage war or to build palaces, but they often didn't have all the money they "needed", so they had to borrow it. To facilitate this large scale borrowing, they created a Central Bank to handle that function. In 1790, "Federalist" Alexander Hamilton advocated for a Central Bank in the United States. Democratic-Republicans, Thomas Jefferson and James Madison believed that the Constitution did not grant the Federal government the authority to create a bank, based on the 10th amendment i.e. that all powers not endowed to Congress are retained by the States (or the people). But Hamilton argued that although … [Read more...]
March Inflation Crashes
The U.S. Bureau of Labor Statistics (BLS) released its March Inflation report on April 10th, 2020, for the 12 months through the end of March 2020. Annual Inflation Down Sharply Inflation fell sharply to 1.54% in March from 2.33% in February and 2.49% in January. CPI Index in February was 258.679 and fell to 258.115 in March. Monthly Inflation for March was -0.22%, February was 0.27% typically January through May are highly inflationary so this was VERY unusual. The FED has massively cranked up the "printing presses" using "Quantitative Easing" in an effort to stimulate the economy in the wake of COVID-19. FED Funds Rate down sharply. Next release May 12th Annual … [Read more...]
What is the Federal Funds Rate?
By law banks are required to maintain a certain percentage of their assets in reserves at any given time. This money is held at the Federal Reserve bank and is called the “Reserve Requirement”. Generally, this money does not earn any interest. But, any money over and above this minimum can be loaned to other banks to who might not have enough reserves. The rate that banks can charge each other is called the “Federal Funds rate” or “Fed Funds Rate”. The monetary policy-making body of the Federal Reserve System, is called the “Federal Open Market Committee” or “FOMC”. The FOMC meets eight times a year to discuss the economy and decide on any changes to monetary policy. One of the major … [Read more...]
Will the $2 Trillion Covid-19 Stimulus Cause Inflation?
The current round of massive Corona Virus easing began Monday March 16th, 2020, with the FED buying $40 billion in Treasuries and then buying another $50 billion in Treasuries on Tuesday. By Thursday morning, it had upped the plan to $75 billion PER DAY and added $10 billion in mortgage securities. By Friday morning, the Fed had decided to buy $107 billion worth of Treasuries and mortgage-backed securities. In its first week, the FED purchased $317 billion worth of assets, which is slightly faster than the Fed balance sheet grew at the height of the 2008-2009 financial crisis. Initially, the Federal Reserve estimated purchases of $500 billion but FED chief Jerome Powell said the initial … [Read more...]
Does the FED Control Mortgage Rates?
For new home buyers, anything that increases the cost of the purchase (like rising mortgage interest rates) can negatively impact your ability to be able to afford your home. That is why everyone is concerned when the Federal Reserve (i.e. the FED) raises interest rates. The following chart shows how the Fed Funds Rate has performed from January 2015 through July 2019. The FED lowered the FED Funds rate to near zero in response to the market crash in 2008-2009. It kept it there until January 2016 when it began gradually raising rates. However, at their July end meeting, they decided to lower interest rates, reducing the federal funds rate target by 25 basis points, to a range of 2% to 2.25%. … [Read more...]
5 Reasons to Invest In Gold
Gold has a long history that goes back to thousands of years. As we said here, "Gold came in common use in 3000 B.C. when Egyptians started making it into jewelry. It wasn’t until years later that gold began being used as a medium of exchange." It has cultural significance in most parts of the world. Throughout most of this time, gold was money. Paper or "fiat currency" did not exist until fairly recently. However, today the investment trends in gold have changed. Now, people invest in gold mostly for economic reasons. Investors all around the world buy it because they see gold as an inflation hedge. Here, in this blog, we'll discuss five important reasons to invest in gold right … [Read more...]
