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GOLDSEEK RADIO

Kevin Kerr

& Chris Waltzek – Aug. 10, 2010

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Currency and Inflation

The concept of inflation has been around since the beginning of time. Inflation is a rise in the general level of prices of goods and services in an economy. Inflation can be measured in any time period, but it becomes noticeable over a longer time frame when looking at prices.

There can be daily inflation when hyperinflation is in full effect, and this has happened in many South American and African countries. When there is hyper inflation good and services are re priced on a day to day basis. It can get so bad that employers will pay people intraday so that they can buy goods during their lunch break because the prices might be rising so dramatically.

Currency and inflation go hand in hand. The amount of a particular currency you posses will determine your buying power. If prices start to rise because of inflation the currency you have in your bank account will not buy you as much as it did. The opposite is true when there is deflation. When the cost of goods and services start to decline your currency will buy you more.

There is a fine line between too much inflation and deflation. Economist will often have different opinion on where a good medium might be. Most feel that a small steady rate of inflation is best as compared to zero or negative inflation. When inflation rises, hard assets like real estate and gold will become more valuable. Your buying power will be less for items like clothes and food, but is offset if you own hard assets.

The cause of inflation is usually an increase in the money supply. In today’s economic environment the government is pumping money into this supply, trying to stimulate economic growth. They government can do this by selling debt in the form of United State Treasury Bonds and Bills. If no one wants to loan us the money, the Treasury department will simply buy its own bonds, this is basically like printing money.

If there is more money pumped into the system each unit of currency should theoretically be worth less because there is more of it. You will then need more of it to buy the good and services in the economy.

At the moment the inflation rate has remained zero to negative, even as the government is pushing money into the economy. This is because the money being put into the economy is being used by the banks and people to pay down debt. Since there were big losses incurred during the middle part of the decade, the money supply is going to pay down these losses.

If the money was going directly into the pocket of people, and they would be spending it, then there would be more signs of inflation. Employers are not paying more either in the current environment. Wage increase is also a sign of future inflation, so when wages start to increase, inflation might be down the road.

The countries in the world today that have less national debt will be in far better shape than those who have issued bonds to pay for their debt problems. The more smoothly the economy is working the higher the interest rate will be. The higher rate is because the government is not trying to stimulate the economy, just trying to maintain an environment where there is very low inflation.

Any investor can look at forex currency charts to gauge the strength of a countries economy. When the currency is lower versus other currencies investors can assume the country is experiencing low growth and the government is trying to stimulate spending.

Investors will put their money into a currency that is appreciating because the country is more than likely raising interest rates to combat too much growth. Investors are always looking for the best yield, and the countries economics and money supply play an important role in money management decisions.

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