Inflation Isn't All Bad!

Inflation is devastating in a poor country. It can cause unrest, uprisings, starvation, and other awful effects.  But, in a country with abundant natural resources, vibrant entrepreneurial activity, access to capital and equity markets, and a skilled and available labor force, inflation isn't all bad!  In fact, it can actually lead to very positive outcomes such as job creation!

I realize that those higher costs put pressures on the economy, but we also need to consider the benefits they lead to.  Inflation can also lead to greater profitability which in turn leads to job creation.  Take oil producers today.  With the recent inflation in oil prices oil companies are making windfall profits.  The cost of producing a barrel of oil isn't going up.  The price has simply skyrocketed over fears of Libya disrupting the supply. Take the rising price of copper, silver and gold.  Miners are making a fortune from higher prices because the cost of mining those materials hasn't gone up. 

Greater profitability attracts more competition.  There is more oil exploration > more jobs.  More equipment is purchased to drill for more oil and mine metals > more jobs.  More research is done to create alternatives to higher material costs > more jobs.  Consumers purchase energy inefficient cars  and therefore car manufacturers make and sell newer automobile models > more jobs.  Homeowners buy replacement windows and a new furnace so they burn less oil > more jobs. Manufactures replace old inefficient equipment and look for ways to consume less oil and materials > more jobs.

Eventually, the extra profitability attracts enough competition and a more robust supply which in turn drives the price back down again.  In the process the supply of those materials has been increased to meet greater demand while at the same time producing greater output at a lower cost.  And there are consumer benefits too.  Take the automobile engine as an example.  Today you can purchase a car with 300 horsepower that get's nearly 30 miles to the gallon!  Or, you can purchase a hybrid that gets 50+ miles to the gallon. Or an all electric vehicle.  These developments would not have happened if oil hadn't spiked to over $100 a gallon in recent years.  Think about all the green jobs that have been created due in large part to the rising cost of oil! 

When the cost of any commodity rises it can lead to inflation in goods that are made with it or are used in the process.  But eventually the free market works its way in order to either drive raw material costs back down, or lessen the impact of those material costs, or provide alternatives altogether.  In the process typically jobs are created!  And consumers end up with better products that require or use less of that commodity.  Advances in automobiles and solar energy and new materials are just the beginning of what happens of what happens as a result oil price inflation!

In conclusion, a healthy economy adjusts to inflation.  America has a healthy free market entrepreneurial based capitalistic system that naturally adjusts to inflation, unlike a closed dictatorship like there was in Egypt or still is in Libya and other underdeveloped countries.  In fact, you might even say that inflation is what really caused the uprising in Egypt!  Countries that don't have an economy like America are vulnerable to inflation.  In the end, it may be the Federal Reserve that over throws Iran!

Everyday Versus Someday

Everyday the Federal government borrows nearly $4 billion dollars and puts in the hands of consumers!  How so? The Federal deficit is some $1.5 trillion which works out too approximately $4.1 billion dollars a day on average that the Federal government spends more than it brings in revenue.  Where does that money go?  Everywhere, but at the end of the day it's ultimately in consumers' hands.  The consumer may get it through social security benefits, a medicaid payment, salaries at some defense contractor, school teacher pensions, or some government workers paycheck. Some slips off to foreign countries, but one way or another the bulk of it ends up in the American economy somehow.  And, because Americans buy products from all over the world, that $4 billion dollars a day impacts economies around the world!!

To come up with this money the Federal government borrows it from all over the USA and the world.  We borrow and spend.  Nothing new.  What is new is the scale to which we borrow and spend.  The size of the debt and deficit is staggering.  It's such a big number that it's too difficult to read or calculate it with all the zeros, so people HAVE to use the word trillions! 

Someday that has to stop!  One day soon the Government is going to hit the borrowing wall.  The $15 trillion dollar question is what will happen when the government stops spending $4 billion a day?  To put it in perspective, how would you're household feel if you cut your spending by over 10%?  How would your employer react if revenues were down 10% plus?  How would your county or town or school deal with a 10% budget cut?  Is your answer "not too good?"  That's probably how the economy will do when "someday" is "everyday!"