Jun 28, 2022
3 mins read
There's a lot of news about the Fed getting inflation wrong, but what if they really are wrong 😱? People should be asking themselves as the Fed begins its new meeting cycle. The central bank raised interest rates aggressively for the first time since 1994 and signaled more hikes could be coming soon. But that doesn't mean we are set to see an end to high inflation. It just means that we need more aggressive policy measures to help bring it down again. Why are higher prices such a big deal? A strong economy runs on capital; businesses require money to grow, and consumers spend money to spur demand. So why do we struggle so hard to keep our costs under control this time?
Why do we struggle to keep our costs under control? Lower inflation means more money for investors
Inflation is essentially how central banks try to keep the cost of living down. If the cost of an item goes up, then your money is worth less. But if it goes down, then it's worth more. But inflation is a double-edged sword. When it's too high, it essentially means that you're losing money. And when spending is high, it erodes the real value of savings and makes debt repayment more difficult. So when we have low inflation, and people can actually see the value of their savings go down, we tend to rein it in and rein it in quickly.
Robust economy means robust spending
When people have more money in their pockets, it spurs demand. When everyone spends money, more businesses are created. There's an economic boost to the whole thing. Inflation also affects spending because the purchasing power of your money goes down when inflation goes up. So while the $5 bill may have seemed like a lot of money when you first got it, by the time you've got a family to feed with it, it's not worth much at all.
The real value of savings is eroded by inflation
If you got $1,000 in your bank account today, by tomorrow, that amount might only be worth $900. The only way to make your original $1,000 last longer is if you spend it. And if you spend it, you don't have any money to save. See how inflation can erode the real value of savings?
Inflation also erodes the value of debt
One of the big benefits of having a debt repayment is that it's a way to make regular payments to someone who's loaned you money. If inflation is low, then the real value of your debt repayment is also low. It's there every month, and it's just not worth as much as it could be. And that can make it harder to repay. Plus, if you miss a repayment, then you start accruing interest. That interest is a cost, and it's a cost that's added on top of the real value reduction.
How crypto can fix inflation
Cryptocurrencies are digital assets that are not tied to any central bank or government. They're decentralized, meaning no one person, bank, or institution controls them. They're also inflation-proof because the only way to create more is for people to use them and make purchases. The total supply of crypto has been capped, such as Bitcoin. However, inflation has tanked the price of Bitcoin and other cryptocurrencies in the current high inflation environment. Despite the drop, many retailers joined the crypto wagon and built the blockchain infrastructure. People are preparing for the next boom to come.
So why are higher prices such a big deal?
If inflation is just a sign that the economy is doing well and that demand is high, then why should we care? Because rising prices also mean rising prices. That's right. Everything you buy is going up in price from when you wake up in the morning until you go to bed at night. High prices are the only constant in life.
Inflation is the natural consequence of high economic growth. The only way to make the dollar last longer is to spend money. And the only way to spend money is to earn it. If you earn $1,000 in earnings, you can only spend $1,000 on things. If those things' cost rises to $1,100, then you only have $100 left for future expenses. That's why high inflation indicates that the economy is doing well. But if the Federal Reserve were getting inflation wrong, the economy would get out of control. That is why the market is volatile to determine what is right. We shall see how it will go.