Gaming Inflation

If the recent jump in your weekly grocery bill has you worried, guess what?  You are not alone.  In response to higher energy costs, food prices have soared due to the rising cost of harvesting crops, processing foods, and transporting ingredients from the field to a neighborhood grocery store.

The same dollar that purchased a gallon of milk, now only buys a quart.  In short, the US dollar today is worth less due to what is commonly referred to as inflation.   What is inflation and what can we do about it?

Inflation can be caused by an increase in demand or an increase in the supply of money used to purchase goods and services.  In a perfect storm a country expanding economically (i.e China) can drive up the prices of key global commodities such as oil, while at the same time have a devastating affect on contracting economies (i.e. USA) that depend on the same oil to survive.  Consumers in the weaker economy (i.e. USA) must depend on their governments to mint additional currency and inject these funds through various mechanisms to help make ends meet in the short term.  Otherwise, the rising cost of fuel and food in a cash-poor local business environment will trigger economic collapse, because consumers will not have enough cash-on-hand to buy what they need to survive.

Minting more dollars to help consumers what they need is the government’s way of a ‘quick fix’, but it can also trigger severe consequences and side-effects to a local economy or system.   First and foremost is the inevitable increase in the supply of dollars throughout the global banking system.  Too many dollars injected into a system will dilute the value of the other dollars based upon their exchange rates with other currencies.  People holding dollar denominated investments will further aggravate the system by unloading their assets to buyers demanding lower prices.  As the dollar sinks in value worldwide, the cost of US imports rises.  Unless these imports can be replaced through local production (or importers are willing to accept lower margins, an unlikely event), prices will inflate.

Inflated prices among a cash-strapped consumer base is perhaps the primary catalyst needed to overhaul a laggard economy.   Key to a successful and sustainable transition is a government’s willingness to promote innovation and efficiency through effective and realistic policies.  As the various economic crises in Europe continue to teach us, printing money or extending loans is a dangerous game that will only result in inflation.  Politicians should evaluate new business models that can easily integrate financial innovations within a rapidly changing geopolitical world.

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