Tuesday, December 27, 2016

Deflation and inflation

The historical annual average is about 3% inflation. CPI is not a good gauge any more after energy and food have been excluded.

Inflation is:

·         An invisible tax to the rich.

·         A strategy to lessen the loan burden. To illustrate, your loan of $1 can buy a loaf of bread now, and you will pay back the $1 plus negligible interest that can buy only half a loaf of bread due to inflation.

·         An invisible salary cut.

·         An invisible cut to your entitlements/welfare. Social security is supposed to be adjusted to CPI, which can be manipulated by the government by not using food and energy to reduce social security payment increases.

·         An invisible cut to your investment incomes (dividends and appreciation).

Deflation is no angel:

Deflation is far worse than inflation to the economy. When the company produces a product and finds out they have to sell it for less due to deflation, then their profit would be cut and they might need to lay off employees.

Deflation would destroy all financial institutions. It makes all their collaterals on all loans less valuable and the borrowers may give up their collaterals as they’re worth less.

Inflation and deflation at the same time

As of 2014, we have both inflation and deflation at the same time for several years now. 

We have inflation in most of our basic necessities: food, gasoline and heat (especially important for the NE) with the exception of rent due to the depressed house prices. Electronic stuffs and PCs are deflated considering how much we can buy today vs. last year. Cars have been slightly deflated when figuring in the extra features. They are due to technological advances.

As of 2016, our energy cost has been deflated due to OPEC’s dumping in order to finance their current projects in this poor global economy.


The government should ensure inflation and deflation are within an acceptable range (3% to me). It has printed a lot of money and lower interest rate to stimulate the economy. At the same time inflation has been accelerated in many sectors. When the economy does not improve, the government has run out of tools to improve our depressed economy.

However, beside time the shale energy may cure all problems. When the economy improves, the inflation and the interest rate would most likely increase. Oil price depends on supply and demand. The poor economy will decrease the supply and hence the oil price would be depressed.

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