Inflation
No one who is my age or younger in the US really has any experience dealing with inflation. If anything, we’re used to consumer goods, especially electronics, getting cheaper each year.
I’m looking at the reports of 4.3 percent inflation over the past year, and the 4.5 percent interest we’ve been getting on our main savings account doesn’t sound like such a good deal. On the other hand, it beats the negative returns that my retirement account (which is mostly stocks) got. And it’s hard to see how banks are making money on mortgages in the 5% range, even setting aside the wave of defaults.
The headlines about stagflation are ridiculously premature. But what’s true is that the Fed can’t do anything to combat inflation without risking turning the downturn into a full-blown recession. So the hope is that weak consumer demand will control prices. But the stimulus package and its "rebates" are supposed to increase consumer demands.
So what exactly are we supposed to be doing?
February 28th, 2008 at 8:41 am
I was also left feeling vaguely unpatriotic about the stimulus plan. Because honestly, my first thought was to use it to pay off fixed expenses.
Isn’t it true that during times of inflation people tend to spend all their money as soon as they get it, to maximize its buying power?
February 28th, 2008 at 9:20 am
I know reality will be a bit different, but when I’ve seen bloggers ask “What will you do with your stimulus money?”, the answer is overwhelmingly that people are planning to pay off debt or maybe even save. If one has debt at higher than that 4.5% interest (or if there’s the possibility of the interest rate going up), paying off debt is potentially an effective form of “savings.”
February 28th, 2008 at 11:02 am
This morning, Basil was reading the paper and told me that the fed might cut rates again, and I responded, “It’s not working! They keep cutting, and it’s not working!” And he agreed and said that instead, we would have to plan to spend 5-10% more on things like groceries to deal with inflation.
Brilliant, fed.