Quote:
Originally Posted by Spin  ^ Im a bit confused about all this talk of inflation. If this money that is being printed is largley being given to companies who are hoarding it to avaoid bankruptcy then how will that money ever trickle down into the economy to cause inflation.
Is there something I'm missing?, most talking heads seem to be of the opinion that inflation is off the table for at least the rest of 2009. |
There are two main causes of inflation, the most common being demand driven. Clearly there is little of that about right now...
The other is fiscally-driven, namely when a Government simply does not have enough money, cannot borrow (more) and, rather than cut expenditure (or default altogether), its prints money to pay those creditors that will accept its own currency. Thankfully Governments are seldom mad enough to try this, as it creates self-perpetuating inflation, i.e. more paper money chasing the same number of physical assets. Zimbabwe and the Weimar Republic are two good examples of this policy in full-swing.
At the same time, or even in fear that it will be attempted, confidence will be lost in the currency concerned, which will cause it to be devalued against other currencies. This effect on inflation was not so significant in the 1930's, as economies did not have total reliance on imported goods, as some do today, but it did add to the inflationary spiral. Recently, with great dependance of significant economies being utterly dependant on imports, such as the UK and USA, the risk of 'imported inflation' is large too. It is my view that, without printing so much as an additional 5-pound note, the UK's recent 30% drop in Sterling will see many goods increase in price well into double figures. Add the two effects together and you end up with Mugabenomics.