INFLATION INFLATION OR DEFLATION, TELL ME IF YOU CAN WILL WE BE
ZIMBABWE OR WILL WE BE JAPAN? Slide 2 INFLATION IS A GENERAL
INCREASE IN PRICES OVER TIME, OR A GENERAL DECREASE IN THE VALUE OF
MONEY I JUST BOUGHT FOUR TIRES FOR ONLY $400 I REMEMBER WHEN $400
BOUGHT AN ENTIRE CAR Slide 3 THE MOST COMMON WAY TO MEASURE
INFLATION IS WITH THE CONSUMER PRICE INDEX (CPI) THE CPI TAKES A
REPRESENTATIVE SHOPPING BASKET OF COMMONLY PURCHASED GOODS AND
SERVICES AND TRACKS HOW THE PRICE OF THAT BASKET OF THINGS CHANGES
OVER TIME. Slide 4 IF, IN 1920 THIS BASKET COST $20.00 TO FILL AND
IN 2012 IT COST $200.00 TO FILL WITH THE SAME ITEMS CONSUMER PRICE
INDEX THEN THE PRICE LEVEL IN 2012 IS TEN TIMES WHAT IT WAS IN 1920
Slide 5 CHANGES IN THE PRIORITIES OF CONSUMERS CHANGES IN
TECHNOLOGY OF COURSE, ECONOMISTS HAVE TO ACCOUNT FOR CHANGES IN
CONSUMPTION BEHAVIOR Slide 6 THE CPI DOUBLED FROM 1985 TO 2009, SO
ON AVERAGE THINGS COST TWICE AS MUCH IF AN APPLE COST $.50 IN 1985
ODDS ARE IT COST ABOUT $1.00 IN 2009 Slide 7 A DOUBLING OF PRICES
IN 24 YEARS SOUNDS LIKE A LOT OF INFLATION BUT IN FACT IT AVERAGES
OUT TO ONLY ABOUT 3% PER YEAR. THE RULE OF 72 SAYS THAT WITH
INFLATION OF 3% PER YEAR, PRICES WILL DOUBLE IN ABOUT 72/3 = 24
YEARS. Slide 8 WHAT CAUSES INFLATION? Slide 9 WHAT IS MONEY?
ANYTHING YOU CAN BUY STUFF WITH CASH CHECKBOOK MONEY CREDIT LOANS
Slide 10 WHY DID HOUSING PRICES RISE SO RAPIDLY IN THE EARLY 2000 S
? LOWER INTEREST RATES ALLOWED PEOPLE TO BORROW MORE AND BID UP
PRICES Slide 11 RATIONING, PRICE CONTROLS AND PATRIOTISM PENT UP
DEMAND WAS RELEASED AFTER THE WAR HIGH LEVELS OF INFLATION IN POST
WORLD WAR II AMERICA Slide 12 LBJ CREATES THE GREAT SOCIETY LBJ
EXPANDS THE VIETNAM WAR DRAMATIC INCREASES IN GOVERNMENT SPENDING
CAN CAUSE INFLATION THE PRICE INDEX IN THE LATE 1960s RAPIDLY
ACCELERATED FROM THE SPENDING Slide 13 THE O.P.E.C. OIL EMBARGO IN
THE FALL OF 1973 SPURRED AN 11% RATE OF INFLATION IN 1974 INFLATION
CAN ALSO BE THE RESULT OF A SUPPLY SHOCK Slide 14 SEVERE DROUGHT IN
2012 AND THE IMPACT ON CORN PRICES HALF THE CORN CROP LOST U.S.
PRODUCES 40% OF THE WORLDS CORN GLOBAL FOOD SHORTAGES CATTLE FEED
PRICES UP MEAT AND DAIRY PRICES UP ETHANOL PLANTS IDLE GAS PRICES
SPIKE HIGHER DELIVERY COSTS THUS RETAIL PRICES AIRLINE TICKET
PRICES UP TOURISM REVENUE DOWN HIGHER HOUSEHOLD WATER PRICES AS
MORE IS DIVERTED FROM CIVIC USE Slide 15 HAVE YOU EVER HEARD
SOMETHING LIKE THIS? INFLATION IS PARTICULARLY MADDENING BECAUSE
PEOPLE SUFFER FROM MONEY ILLUSION $3.00 FOR A GALLON OF MILK!!!? I
REMEMBER WHEN IT WAS $.72 A GALLON Slide 16 BASED ON OUR PREVIOUS
COMPARISON, IF WE ADJUST FOR INFLATION, THAT $.72 GALLON OF MILK IN
1920 SHOULD COST $7.20 IN TODAYS DOLLARS. THE OLD MAN HAS COMPARED
THE NOMINAL PRICES OF MILK THE REAL PRICE OF MILK HAS ACTUALLY
FALLEN Slide 17 IF MY WAGE WAS $.75/HR IN 1920 IF MY WAGE IS
$15.00/HR IN 2012 IT ALSO TAKES FEWER HOURS OF LABOR TO BUY THINGS
THAN IN THE PAST ONE HOUR OF LABOR TO BUY MILK12 MINUTES OF LABOR
TO BUY MILK Slide 18 INFLATION ERODES THE GAINS FROM SAVINGS
INFLATION MAKES IT DIFFICULT TO PREDICT PROFIT INFLATION MAKES IT
DIFFICULT TO COMPARE MONEY TODAY WITH MONEY TOMORROW Slide 19
SAVERS AND LENDERS ARE REWARDED WITH A RATE OF INTEREST FOR THEIR
RISK 5 - 3 = 2 NOMINAL ANNUAL RATE OF RETURN OFFERED BY THE BANK
ANNUAL RATE OF INFLATION REAL RATE OF RETURN ON INVESTMENT THE
GAINS WILL BE LESS THAN YOU EXPECTED Slide 20 BUSINESSES WILL
INVEST IN NEW CAPITAL OR LABOR IF THEY BELIEVE THE REVENUE
POTENTIAL IS GREATER THAN THE COST Slide 21 THE PROBLEM IS IF YOU
DONT KNOW WHAT THINGS WILL COST, ITS DIFFICULT TO ESTIMATE
REVENUES. Slide 22 LARGE AMOUNTS OF INFLATION CAN CAUSE SERIOUS
DAMAGE TO ENTIRE ECONOMIES Slide 23 PRINTED CURRENCY TO PURCHASE
FOREIGN RESERVES AND PAY OFF ITS DEBTS TO THE IMF PRINTED MORE
CURRENCY TO PROVIDE 900% PAY RAISES TO POLICE AND ARMY PERSONNEL
PRINTED MORE CURRENCY TO PURCHASE OXEN AND PLOWS FOR THE RURAL
FARMERS SHOPS CAN ONLY CASH CHECKS IF THE CUSTOMER WRITES IT FOR
TWICE AS MUCH, THE VALUE WILL BE HALVED BY THE TIME IT CLEARS
ZIMBABWEAN GOVERNMENT GOES ON A SPENDING SPREE Slide 24 DEFLATION
CONSUMERS LOSE CONFIDENCE AND STOP SPENDING PRICES FALL WAGES FALL
AS A RESULT OF LESS BUSINESS INCOME CONSUMER DEBTS INCREASE AND
EXISTING OBLIGATIONS BECOME HARDER TO MEET PEOPLE CUTBACK AND SAVE
MAKING MATTERS WORSE JAPAN NOT ENOUGH MONEY IN THE ECONOMY CAN BE
EQUALLY DEVASTATING Slide 25 THE NATIONS EXTRAVAGANT LIVING IN THE
1980S LED TO THE BURSTING OF AN ASSET BUBBLE THE GOVERNMENT
INCREASED INTEREST RATES TO CONTROL PRICES JAPANS AGING POPULATION
REJECTED EXCESS AND REDUCED SPENDING COMPETITION FROM OVERSEAS
FORCED JAPANESE COMPANIES TO REDUCE PRICES INTEREST RATES HAVE
FALLEN BUT THE GOVERNMENT REFUSES TO INFLATE THE CURRENCY OUT OF
DEFERENCE TO THE ELDERLY PRICES AND WAGES REMAIN DEPRESSED TWENTY
YEARS LATER JAPANS LOST DECADES Slide 26 BAILING OUT BANKS AND
INDUSTRIES, AND BUYING BONDS EXTENDING TAX CUTS AND EXPANDING
WELFARE IN RESPONSE TO THE GREAT RECESSION, OUR GOVERNMENT HAS
TAKEN EXTRAORDINARY MEASURES Slide 27 UNEMPLOYMENT IS STILL HIGH
CONSUMER AND BUSINESS CONFIDENCE IS LOW YET THE U.S. ECONOMY HASNT
REBOUNDED WITH ANY ENTHUSIASM Slide 28 WILL THE U.S. BE ZIMBABWE OR
JAPAN? WILL OUR OLD SPENDING WAYS RETURN AND ALL OF THE MONEY
GENERATED AS FISCAL AND MONETARY RESPONSES TO THE CRISIS FLOOD THE
ECONOMY? OR WILL THE DEPRESSION IN THE HOUSING MARKET AND LOW
CONFIDENCE IN THE PROSPECTS FOR THE U.S. PLACE THE NATION IN A
RUT?
