Alice in "Flation" Land

by SixFigureStart | April 22, 2009

  • My Vault
'The question is,’ said Alice, ‘whether you can make words mean so many different things.’ ‘The question is,’ said Humpty Dumpty, ‘which is to be master, that’s all.’

After Alice left Numberland, she found herself in ‘Flation Land, where she encountered Humpty Dumpty, so robust in good times, now perched precariously on his Wall. Alice solemnly pondered Humpty’s fall. All the King’s horses and all the King’s men had put the many pieces of this delicate egg back together (with the help of scotch tape and a little tarp), but which “flation” would be master, Alice wondered. Would it be Deflation? Stagflation? Inflation? Perhaps even the dreaded Hyperinflation?

Alice knew: Inflation would be master. The magical trillions conjured out of thin air in Numberland had convinced her of that much. It was just a question of when. Inflation, the rise in prices caused by an increase in money supply, is inevitable when so many dollars are pumped into the system. Once the stimulus works its magic, there will likely be a rush for scarce goods and services. Warren Buffett predicts that, thanks to the government’s costly economic rescue efforts, inflation could eventually exceed the highs of the 1970s.

But, it has also been suggested that inflation offers a convenient means of reducing the cost of our ever-expanding debt. As the dollar’s purchasing power is eroded by price hikes, any amount owed is worth less. Say you owe $1,000 and prices double. The value of that debt is effectively halved because, post-inflation, that $1,000 buys half as much. Not bad if you’re a debtor. A nightmare if you’re a lender. The money you lent has become less valuable, and the interest charged was too low, resulting in a loss. Any subsequent loans will be at exorbitant rates, to compensate for inflation. [more]

--Posted by Mariem Horchani, RecessionWire.com

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