A lot of people are aware of inflation. They hear the term mentioned by talking heads on the TV. Some of these talking heads refer to it as a useful thing, so long as it is properly controlled. They warn gravely of the dangers of the opposite error, deflation. What they do not tell us is what either term means.
What Is Inflation?
Inflation is a rise in the price level, and a fall in the real purchasing power of monetary units. During a period of inflation, your dollar bill will be able to buy fewer and fewer bananas. To give a picture of how much inflation has been going on, understand that one dollar 100 years ago could buy you 50 lemons. Today, one dollar can buy you about 2 lemons. That means as measured in lemons, the price level has become 25 times higher. For some commodities it is somewhat less, for some, like housing, it is probably more. Your dollar has depreciated in value due to the ongoing quiet increase of the money supply by the marvelously intelligent bankers of the Federal Reserve system.
What Is Deflation?
Deflation, while rarer, is the opposite condition of inflation. Deflation is when prices decrease, and the relative value of monetary units increases. During a period of deflation, your dollar bill will be able to buy more and more bananas. Deflation often occurs after a third world country pegs its bad money to a new international standard. This is what Zimbabwe and Ecuador did recently. Many people violently oppose deflation, because they assume that a decrease in price levels is bad for workers’ wages, which is true. Wages are a form of price. However, what they fail to realize is that decreasing price levels also lower the cost of groceries at the grocery store. The coin of deflation, like that of inflation, has two sides. Whether or not you like one depends on whether you are selling or buying. If you are selling or working, you probably want prices to generally increase, or go into inflation. Powerful business lobbies in government probably explain the general trend toward long-term inflation. If you are buying, you probably want prices to generally decrease, or go into deflation.
Protecting Your Portfolio
Some people advocate getting short term loans to protect against inflation. This might assist you if you are not able to keep up with the rising pace of price levels as a buyer. You have to be careful, however, because the ability to pay them off depends on your ability to sell well. Another great way to protect your portfolio from the inflation attack on the value of your money is to buy gold, silver, land, or other useful property. Think of something that has long term value, no matter how old it is. People for thousands of years have liked gold because of its stable value as compared to commodities. The value of an ounce of gold can get you a nice suit today, as it could 100 years ago. This is not true of paper currencies. Diversifying your money when you get it from an employer is essential. Do not just have it all in a bank. Make sure that you spread it around in various kinds of useful assets.
Whether or not you win the war against inflation is partly dependent on how clever you are. Do not trust what you hear from the mainstream media. Most of them are managed by companies who have a strong interest in maintaining a state of inflation. Listen to common sense. Do not give your grandchildren a worthless stack of dollar bills that you slaved decades to pile up. Give them a nice stack of gold, silver, and land, and they will thank you for it.