Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 27

The real measurement of the inflation effect comes down to affordability. Sure the prices have increased but so have our wages, enabling us to keep up with the cost of living. Let's look at this concept from a geographic standpoint. A house (well maybe an apartment) in New York City costs many times more than a comparable house in Bloomington, Illinois. Yet people in NYC continue to pay the seemingly exorbitant prices because they draw a much higher income on average than those in Bloomington.

Inflation does however become an issue when prices rise at a rapid rate in a short period of time.When economists talk about inflation it is usually this malignant version that they refer to. A 10% hike in prices over a period of five years is acceptable but the same increase in one year is cause for alarm. Inflation erodes the value of money, leaving it with less buying power as prices rise out of the affordability range for many. This condition in turn causes a rise in wages to keep up with the higher prices. As more cash is needed to sustain the economy, the central bank is forced to print more money (or extend credit) to keep up with the demand, thereby weakening the currency. An unbridled inflationary condition could turn into a vicious cycle of price hikes, wage hikes, and more currency devaluation until the economy would eventually collapse onto itself. Inflation can be likened to sharks in the ocean. A moderate number of sharks is actually necessary to keep a healthy balance, but if sharks were to suddenly increase in numbers, more and more fish will be eaten up and the sharks will multiply at a faster rate. If the cycle continues without interruption, the ocean will become devoid of fish, which in turn will lead to the demise of the sharks. The survival of the fish and the sharks in the ocean is intimately linked to a sustained delicate balance between their numbers.

So how would the economy collapse if inflation is not reined in? When money loses its value during inflationary times, personal savings


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