| Hi Taylor:
Based on what I've been reading, I get the feeling that we're both
afraid of and in control of inflation. Am I right? Because that doesn't
really make sense to me. - Kira
Hi Kira: What a conundrum, right? If you type "Why is inflation"
into your search bar, the top two autofills are probably going to
be "good" and "bad." We're all apprehensive about it, but as long
as the rate doesn't get too high, and the rises and falls sort of
match each other, inflation is just another tool of economics with
pros and cons.
When you think about the economy, you have to look past jobs and
GDP. Those are huge, significant markers, but the lending system
has almost equal pull as we learned the hard way back in
2008. Home, business, and personal loans serve as a massive pillar
of commerce, heavily intertwined with our government as well as
foreign governments. When inflation rises and gets close to or
exceeds the current interest rate, borrowers can benefit. As a
seller of bonds, our government can eliminate debt by selling
bonds at an interest rate that starts higher but ends up being
lower than the inflation rate. This can backfire when it comes
to consumer confidence, but it's something on the treasury department's
radar, especially when dealing with a deficit like the one we've
got. Also worth considering: even if inflation makes people a
little antsy, it creates a strong push toward buying and investing
when rates come back down.
2. Cons. The main negative goes without saying. Should we
get to the point where a soda costs $14, our money starts to feel
useless and a lot of people struggle. If the dollar falls too
far while the Yen or the Euro shoots up, our international leverage
will suffer. You've probably heard stories of other countries
(most notably Venezuela) where inflation has crippled the economy.
There are no signs of that happening to us, but it's the cautionary
tale we need to be aware of.
3. Control. We fight inflation by raising interest rates and
decreasing spending, so the government can pull the opposite levers
in an attempt to inflate. Low interest rates (as we've had for
a while) lead to extra spending. Coupled with the stimulus and
other big government projects, inflation would be expected to
rise. Then, should the inflation rate eclipse the 2% target, the
Fed might step in to adjust rates and try to hit a little inflation
| As you can
see, there are a lot of things at play when it comes to this issue.
With our big, deserving country and economy, it's not as simple as
saying that inflation is bad and should be avoided, though it's understandably
a little frightening for many investors. Hope this helps!
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an offer or solicitation for the sale or purchase of any specific
securities, investments, or investment strategies. Investments involve
risk and, unless otherwise stated, are not guaranteed. Be sure to
first consult with a qualified financial adviser and/or tax professional
before implementing any strategy discussed herein. To submit a question
to be answered in this column, please send it via email to Question@GoFarWithKovar.com,
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