Understanding Inflation

Understanding Inflation

Inflation is like a thief who lives in our pocket. It has deft fingers that constantly remove some money from our wallet. It drains our purchasing power. Inflation is relentless and eight hours of work we do today, don’t bring as much value as eight hours of work per day we did last year. Inflation is crafty and it can take much the value of our money within a decade. It means that if we keep our money in the bank account for too long, it will eventually lose value. Inflation is the best thief, because it can penetrate through the security of even the best guarded banks. Inflation is an egalitarian thief, it steals money from people, whether he has 5 dollars or 5 billion dollars. Each year, it steals 5 or 6 cents out of each dollar we have.

It means that it can take 30 cents from a poor man and 30 million dollars from a rich man. So who is this very clear thief and where did the thief come from? In early days of currency, inflation happens automatically if a large amount of money is created. Today, the value of inflation is often determined in the huge computer room of central banks after calculating a number of factors.

In order to understand this better, inflation happens when there’s too much money, compared to goods and services. Inflation happens when money becomes unattached from the total services and goods produced. Money move from hand to hand and the money masters or central banks will not allow things to proceed without their meddling. They are the practitioners of the mysterious science of economics. They are confident in their ability in making various changes. They hold their financial beliefs tight and do things based on specific guidance or government policies.

We trust central banks to make correct decisions and they seem to be divine; because what they decide today will affect every man, women, corporation, business, speculator, investor and others. By its very definition, it is a very powerful task and only people with certain knowledge can choose to do these things. Central banks do things based on specific assumptions and they are often not bounded. However, any error in decision can have a far reaching effect on the whole country or the whole world. It means that the inflation rate of US Dollars will have huge effects on the global economy.

Actually, there’s a reason why central banks intentionally create inflation and this is aimed for making sure that the economy will continue to run. This is especially true for investors who own more than $1 million. They know that they will lose at least $60,000 each year and this is not an acceptable situation. Because interest rate of savings account is usually lower than the rate of inflation; they may still lose up to $40,000 each year. Inflation encourages people to work and invest their money. They are hoping to get profits higher than the rate of inflation.