Inflation and Deflation
I discussed this with my business professor. I mentioned deflationary signs and he was very concerned about inflation and hyperinflation. Not just because of the devaluation of currency but because of outstanding debt.
Example:
The Chinese have ~$800Billion in US bonds which pay in Dollars of course. Assume rapid inflation or hyperinflation from dumping lots of money onto the market. This severely weakens the value of the dollar. The Chinese (and other major holders of National Debt) DON'T buy new bonds when they cash in the ones they have because why invest $1 if the capital and return totals 75 cents? The government can't finance it's debt which leads to higher taxes, heavily cut services (like the Armed Forces). Allowing this to happen in the middle of an recession/depression or at the beginning of a recovery causes political and criminal unrest, as well as opening the door for foreign attack.
His theory was that the US government would allow the recession to continue to protect the dollar as much as possible. So long as the debt can be financed we can recover. It's like paying your bills on a circle of credit cards. Dumb move, but as long as you can pay off the debt onto the next card you can continue.
My understanding off the terms is not greatly detailed but i have some thoughts...
Inflation "Too much money chasing too few goods and services."
Inflation on a reasonable scale is a sign of economic growth. It means you have good employment and good wages. Inflation can be affected by the number of products available for purchase as well as the amount of money in circulation.
For example, in 1980 cable TV was just starting, and Atari had a small market. Personal computers were on the horizon, and personal Internet was the stuff of fiction for most. Now Cable TV, Videogames, Cellphones, Internet and a host of other things that did not exist in 1980 vie for our dollar. Adding products to the market both fed and served inflation. With more products you can put more people to work making, transporting, selling and servicing those products. Inflation created jobs. The money needed to be spent, people came up with products for that money. This doesn't work for existing industries. You can't add more of an existing product past its maturity level. It just becomes market glut. You have to add NEW products.
There are also more people in the US now then then. These numbers are just parts of the greater whole.
US Median 1980 Income 4 person family $24,332
US Median 2005 Income 4 person family $67,019
http://www.census.gov/hhes/www/income/4person.html Source
Population growth is also why a gold standard won't work. Yes, a dollar would have definite, HARD value. But as the population increases you'd have the same global amount of currency. Yes new gold is mined all the time but gold is very finite and grows slowly until it cannot grow at all. Population grows geometrically. With a gold standard you will have deflation with every generation, too few grams chasing too many products. Wages will go down or unemployment will skyrocket. There just won't be enough money to run the economy as we know it.
Deflation "Too few dollars chasing too many goods and services."
If fewer dollars are being spent, fewer goods are being produced, less hours for the workers making them resulting in less money for products ad infinutim. the Fed is trying to limit this by lending to banks at ridiculously low interest rates. they are also "giving" the money away to stabilize the banks. Unsupported banks fail when people make a run on them. This causes many more undesirable things that destabilize a population. The government, thru the fed wants people to spend money, people are afraid to since real unemployment is rising. The banks have not increased lending because they are scared too.
I'm simplifying things to my level of understanding.
RGB
PS, The example is a paraphrasing of Desmond Chun, Chabot Community College, credit where due.
Example:
The Chinese have ~$800Billion in US bonds which pay in Dollars of course. Assume rapid inflation or hyperinflation from dumping lots of money onto the market. This severely weakens the value of the dollar. The Chinese (and other major holders of National Debt) DON'T buy new bonds when they cash in the ones they have because why invest $1 if the capital and return totals 75 cents? The government can't finance it's debt which leads to higher taxes, heavily cut services (like the Armed Forces). Allowing this to happen in the middle of an recession/depression or at the beginning of a recovery causes political and criminal unrest, as well as opening the door for foreign attack.
His theory was that the US government would allow the recession to continue to protect the dollar as much as possible. So long as the debt can be financed we can recover. It's like paying your bills on a circle of credit cards. Dumb move, but as long as you can pay off the debt onto the next card you can continue.
My understanding off the terms is not greatly detailed but i have some thoughts...
Inflation "Too much money chasing too few goods and services."
Inflation on a reasonable scale is a sign of economic growth. It means you have good employment and good wages. Inflation can be affected by the number of products available for purchase as well as the amount of money in circulation.
For example, in 1980 cable TV was just starting, and Atari had a small market. Personal computers were on the horizon, and personal Internet was the stuff of fiction for most. Now Cable TV, Videogames, Cellphones, Internet and a host of other things that did not exist in 1980 vie for our dollar. Adding products to the market both fed and served inflation. With more products you can put more people to work making, transporting, selling and servicing those products. Inflation created jobs. The money needed to be spent, people came up with products for that money. This doesn't work for existing industries. You can't add more of an existing product past its maturity level. It just becomes market glut. You have to add NEW products.
There are also more people in the US now then then. These numbers are just parts of the greater whole.
US Median 1980 Income 4 person family $24,332
US Median 2005 Income 4 person family $67,019
http://www.census.gov/hhes/www/income/4person.html Source
Population growth is also why a gold standard won't work. Yes, a dollar would have definite, HARD value. But as the population increases you'd have the same global amount of currency. Yes new gold is mined all the time but gold is very finite and grows slowly until it cannot grow at all. Population grows geometrically. With a gold standard you will have deflation with every generation, too few grams chasing too many products. Wages will go down or unemployment will skyrocket. There just won't be enough money to run the economy as we know it.
Deflation "Too few dollars chasing too many goods and services."
If fewer dollars are being spent, fewer goods are being produced, less hours for the workers making them resulting in less money for products ad infinutim. the Fed is trying to limit this by lending to banks at ridiculously low interest rates. they are also "giving" the money away to stabilize the banks. Unsupported banks fail when people make a run on them. This causes many more undesirable things that destabilize a population. The government, thru the fed wants people to spend money, people are afraid to since real unemployment is rising. The banks have not increased lending because they are scared too.
I'm simplifying things to my level of understanding.
RGB
PS, The example is a paraphrasing of Desmond Chun, Chabot Community College, credit where due.