Editor's Note: There is only one real way to create wealth and that is to build something. If you take $50,000 worth of lumber, metal and glass and combine it with $50,000 worth of skilled labor you can come up with a $150,000 house. You have in effect created $50,000 out of thin air. Or by machining a $2.00 lump of metal you can create a $20.00 gear or a $200 watch. It all depends on the skillful application of technology to raw materials. Everything else is just rearranging deck chairs on the Titanic. In the short term, rearranging deck chairs can be very profitable for an individual but it doesn't "create wealth" it simply transfers it from one person to another. The rapid pace of … [Read more...]
What is Demand Pull Inflation?
There are many different theories that aim to determine exactly what causes inflation. One of the more commonly used arguments by Keynsian's is known as demand pull inflation. What exactly is demand pull inflation and why is it important? Demand Pull Inflation The term "demand pull inflation" is a Keynesian economics term. According to Wikipedia, "Keynesian economics advocates a mixed economy — predominantly private sector, but with a significant role of government and public sector — and served as the economic model during the later part of the Great Depression, World War II, and the post-war economic expansion (1945–1973), though it lost some influence following the tax surcharge … [Read more...]
Effects of Inflation on Savings
Inflation Effects Everyday we hear of commodity prices going up and the value of money going down. We've also heard of inflation and the global economic crisis having a far-reaching effects on the world economy. But have you ever stopped to think how inflation is affecting your everyday financial matters? How is it affecting your savings account? If you haven't given it much thought, perhaps it is time to do so. Below are few ways inflation affects your savings. By giving it a bit of thought, you can work out an alternate plan or be prepared, so you can keep more of your savings. Take a close look: Inflation Reduces the Value of Money: Initially you may have been able to buy … [Read more...]
Inflation and Commodity Prices
It is critical to understand the correlation between inflation and commodity prices and the effects of inflation on commodity prices themselves. In recent years, the global financial markets have been in flux as they've gone up and down repeatedly. The commodities market has been especially volatile with items like gold and oil going up significantly. While a number of different factors contribute to the prices of commodities, inflation is one aspect that has a direct impact on the price of commodities. Inflation and Commodity Prices Inflation is a process that occurs when the purchasing value of a currency is lowered. This is usually determined by comparing the prices of a good or … [Read more...]
Deflation or Inflation? Yes.
Deflation or Inflation? By John Mauldin I am frequently asked in meetings or after a speech whether I think we will have inflation or deflation. "Yes," I readily reply, trying hard not to smirk, as the questioner tries to digest the answer. And while my answer is flippant, it's also the truth, as I do expect both outcomes. Following the obligatory chuckle from the rest of the group comes a follow-up request for a few more specifics. And they are that I expect we will first see deflation and then inflation, but the key is the timing. Recessions are Deflationary Recessions are by definition deflationary. Deleveraging events are also deflationary. A recession accompanied by deleveraging … [Read more...]
Using Forex to Hedge against Inflation
Forex Hedge According to Wikipedia-A foreign exchange hedge (FOREX hedge) is typically used by companies to eliminate or hedge foreign exchange risk resulting from transactions in foreign currencies. In other words, if a company in based in one country most of its expenses are denominated in the currency of that country. So if a company is based in the U.S. most of its expenses are in dollars. But if it sells a significant portion of its products in another country like Mexico then a portion of its income will be in Pesos. If the Peso depreciates against the Dollar the value of their income could cause them to lose significantly even though they thought they were selling at a profit. This … [Read more...]
The Effects of the Increasing Cost of Healthcare on Real People
Healthcare Costs in the U.K. Individuals She is a single female who is self-employed and self-insured. Until this year, the only doctor’s visits she made in the last decade were for annual physicals. Her insurance covered the cost of that preventative care. However, the thought has occurred to her that she might be better off putting her monthly premium in an interest bearing account and paying for those annual visits with money from that account. As a healthy individual, she pays £130 each month only to have a deductible of £3200. In essence, she would have to pay £3330 each year before her insurance would cover any non-preventative claim. Even if the annual office visit cost me £130, she … [Read more...]
UK Economic Outlook Uncertain Despite Falling Inflation
The June economic outlook once again proved to be disappointing for the average household. Lower wages, higher prices and higher debt. Survey compiler Markit announced that its headline Household Finance Index (for the UK) for June rose to 37.0 from a four-month low of 36.6 in May, but remained well below the 50 level necessary for no change in finances compared the previous month. It has remained negative ever since February 2009 with the effect that June saw the worsening of the financial situation of around one third of the respondents as compared to the improvement of only one tenth. Over the next 12 months, the index measuring households' expectations for their finances rose to … [Read more...]
What Is Inflation Accounting?
What Is Inflation Accounting? Inflation has an effect on consumer prices, to be sure, but there are effects on corporate finance as well. Typically, in developed countries, inflation rates are fairly steady and somewhat predictable. However, in times of hyperinflation, prices soar and corporate financial reports can be misinterpreted without accounting for inflation. Inflation accounting offers a more accurate view of a company or individual’s financial situation because it looks at those finances through the lens of inflation. According to Investopedia "Inflation accounting requires statements to be adjusted according to price indexes, rather than rely solely on a cost accounting basis." … [Read more...]
How Does Gold Fare During Hyperinflation?
By Jeff Clark, Casey Research Inflation is a natural consequence of loose government monetary policy. If those policies get too loose, hyperinflation can occur. As gold investors, we'd like to know if the precious metals would keep pace in this extreme scenario. Hyperinflation is an extremely rapid period of inflation, but when does inflation (which can be manageable) cross the line and become out-of-control hyperinflation? Philip Cagan, one of the very first researchers of this phenomenon, defines hyperinflation as "an inflation rate of 50% or more in a single month," something largely inconceivable to the average investor. Hyperinflation has One Root Cause While there can be … [Read more...]
