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Inflation


MZT

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I did some back of the envelope calculations, and I think inflation for the last few decades has been running at 4 to 4.5 percent a year. Forget the official government statistics... hedontic inflation factors and all that... I'm just looking at cost of consumer items as I remember them from the late 80's to early 90's, and what they cost now.

Does 50 thousand dollars sound like a lot of money? My first full time job out of college in 1992 was a salary of 28 thousand. So that would be 50 thousand in 2007 dollars using 4% inflation. It's not as much, as it might sound like.

My grandfather (father's side) was a low level manager in a steel plant, but he could afford to buy a lakeside property in Alabama. My other grandfather (mother's side) wasn't a wealthy person in my mind, but he'd buy a new car every 3 or 4 years and paid for most of his 2 children's college.

I paid for 80% of my own college, drove my first new car for 9 years and am entering the 7th year on my next one. I bought my first house when I was 31... but my parents bought their first home when they were younger than that... and all of us completed 4 year degrees.

I'm getting the impression that not only has money devalued, it's harder to earn enough of it today, to achieve the same things people 30 years ago could.

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I think the fact that credit is so easy to get hurts wages. Why pay more when they can easily borrow from the bank?

I have a theory that when you combin the average credit card debt with the average wages, you will get near to what the average wage SHOULD be after inflation. (I know this isn't the best way to do this, but I have forgotten all of my stat classes)

Let me crunch some numbers...

Edit:

Well I found the number of the average wage today from the Social Security website, and the number of the average debt from MSN.com. However I couldn't find the article I read a few months ago that had what today's salary should be compared to our inflation rate.

According to Social Security Office:

Average Wage: 36,952.94

According to MSN.com

Average Credit Card Debt: 8,000

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I think we're just spending a lot more on things our parents didn't. Cable TV, Internet, multiple TVs, VCRs, and DVD players, way more house than we need, eating out more, more car than we need, video games, cell phones, etc, etc.

Generally, moneywise, we aren't being very smart. We could get by with a lot less than we do, but the media has conditioned us to consume, consume, consume.

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What you say is true to an extent. Many of us buy a lot more gadgets than we used to. But a lot of those gadgets are built cheaply and don't last very long, so rather than buying one blender/toaster every 10 years, you end up having to buy one every 2 or so. Even at $19.99 that's still more than they cost way back when.

Also, real wages (wages adjusted for inflation) has fallen except for a few years in the mid-late '90s since the early 1970s.

So you're right. The average American is spending more and making less, which takes a big toll on purchasing power for things like houses, cabins, cars, etc.

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Deflation discourages investment and spending and encourages saving, as $100 now will be worth $105 in one year based on 5% deflation.

This is very good for people who keep money in jars buried in their backyard.

Inflation, however, is the opposite. It encourages investment and spending. Why does a business just want to keep its money laying around if it will be worth less tomorrow? If you sink that into a new factory or building, it will be worth more.

Inflation also encourages spending from the individual as well. Unless you lock your money up in a CD, savings accounts will not make up for inflation. It also encourages borrowing over saving up for something because borrowing $1000 for something with payments over 1 year at 10% interest is really only like paying 7% interest or so after you figure in inflation.

Banks like inflation because it encourages people to borrow. Even though they'd make more from a loan of $1000, more people will borrow with a steady increase in inflation.

Of course, too much inflation is very bad. 1923 in Germany and 1973 in the U.S are good examples of that.

The nice thing about inflation is that we're set up for it. We have ways to beat it: CDs, the stock market, bonds, etc... also, it's easier to control. We can raise/lower interest rates and increase and decrease the money supply to control it. With deflation, it becomes harder.

Japan has had deflation for much of the '90s to recently and at most banks, you have to pay them a small amount of interest for them to keep your money for you.

Deflation does put the power in the individual's hand though. It's very bad for banks. The Great Depression can attest to that.

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