Why You Should Care About Inflation and Deflation

by Steve Dasseos on June 26, 2009

I used to be a Certified Financial Planner. I gave up all my Securities Licenses (Series 6, 7, 63 & 22) in September 2004 once TripInsuranceStore.com was well established.

I still keep close tabs on what’s happening in the economy. I think everyone should be aware of what is happening in respect to the US economy and your own finances. What follows is a simplified overview.

You’ve heard of inflation and deflation. What’s the difference? And why should you care? Here’s what the dictionary says:

??/?n?fle???n/ [in-fley-shuhn] noun
In Economics: a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency (opposed to deflation)

??/d??fle???n/ [di-fley-shuhn] noun
In Economics: a fall in the general price level or a contraction of credit and available money (opposed to inflation)

The USA’s Great Depression in the 1930s was a deflationary depression. Prices went down which had a severe dampening effect on the US economy. If my Great-Grandparents and Grandparents had buckets of money they could’ve bought a lot of land in the center of any US city for pennies on the dollar.

Around the same time Germany was in a Depression. However, it was an Inflationary Depression. Prices shot up and destroyed the purchasing power of the German Mark. Buckets of money could barely buy bread.

Why This Matters to You

You need to prepare differently if the USA is entering a period of high inflation versus entering a period of deflation. I don’t know where we’re headed.

On one hand, an argument could be made that “Helicopter Ben” has created so much money that inflation’s on the way.

(From Wikipedia: In 2002, when the word “deflation” began appearing in the business news, Bernanke gave a speech about deflation. He mentioned that the government in a fiat money system owns the physical means of creating money. Control of the means of production for money implies that the government can always avoid deflation by simply issuing more money. (He referred to a statement made by Milton Friedman about using a “helicopter drop” of money into the economy to fight deflation.) Bernanke’s critics have since referred to him as “Helicopter Ben” or to his “helicopter printing press.” In a footnote to his speech, Bernanke noted that “people know that inflation erodes the real value of the government’s debt and, therefore, that it is in the interest of the government to create some inflation.”)

On the other hand, deflation appears to be on the horizon. The Dr. Housing Bubble Blog has a good article called Deflating our way to Prosperity: Five Major Sectors of our Economy Pointing to Demand Destruction Price Deflation

The argument between deflation and inflation is still raging like a wildfire. It would seem that there is still no clear consensus as to what is going to happen long term. Just think of how many experts actually saw the housing bubble forming. Not since the Great Depression have we seen consumer prices contract so severely. Much of the argument for inflation comes from the actions taken by the US Treasury and Federal Reserve. Without a doubt, we have never witnessed such massive injections of liquidity and bailouts happening all at once. The argument goes that with so much money pumped into the system we must see prices rising at a certain point. Maybe but that will be for another day. Yet the current facts point to a disturbing menace that is deflation.

Read Deflating our way to Prosperity: Five Major Sectors of our Economy Pointing to Demand Destruction Price Deflation.

Where is the US Economy headed? I don’t know. I think it’s wise to think about both inflation and deflation. Ideally we have neither is in our future.

I hope this makes sense. If you want the right travel insurance advice, call us at 1-888-407-3854 and we'll help you figure it all out.

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