Some money terms are used a lot by the media, and it might benefit some of you lesser mortals to understand what they mean.
Inflationan increase in monetary supply which has the effect of weakening the dollar, causing an increase in prices without a decrease in buying power. For example, ten years ago, a yard of beer might cost you $6. Because there is more money available now than there was 10 years ago, it might cost you $9 for that same yard of beer. The cost of beer hasn’t gone up: just that the dollar value has weakened.
It’s like this. Let’s say you live on an island with ten other people, and you agree to use the junonia (Google it) as your unit of currency. There happen to be 100 of these on the island. That means the total value of everything on the island is 100 junonia shells. A small item might be worth a thousandth of a junonia; a large item, like a house, might be worth five junonia shells. Make sense?
But let’s say that idiot friend of yours, Jaroslav, finds a cache of 50 more junonia shells. What’s your house worth now? Becuase the monetary suppy has inflated to 150 shells, your expensive house is now worth about 7.5 shells. Costs go up, even though nothing else changed. So while you might think, if you were an islander named Paul Krugman, that you just made a pile of money, everything else has gone up another 50% as well. You’ve made nothing.
Inflation increases the cost without increasing the value. If Jaroslav finds another 50 shells, now your home is priced at double what it was…and you haven’t increased its actual value because a gallon of coconut milk now costs twice what it did.
DeflationBut if we decrease the available money supply, that would be a good thing, right? After all, wouldn’t that have the effect of lowering costs without lowering the intrinsic value of those items?Deflation though can be a bad thing right away. If costs go down, so do incomes. An employer doesn’t need to pay Jaroslav as much money, since each time the value of the dollar goes up it’s kind of like a raise for him. Okay, no problem: Jaroslav can live on less money, right?
But what happens if Jaroslav took out a loan for $100,000 a month ago? Now, it’s harder for him to come up with the cash to pay that loan off. As a result, he will be encouraged to default on repaying that money. The bank that loaned him the money will suffer a loss of income right away. The bank has less money coming in.
If the bank offers savings accounts, what happens? The money you have in your account increases in purchasing power, meaning the bank has to pay proportionately more money in interest. So the money the bank pays out to its savings account increases, while the money coming in decreases.
The banks start folding up. And when that happens, the amount of money businesses have to invest and spend goes down. Result? Lots of layoffs. Businesses close from lack of demand. Japan’s economy in the 1990s was hurt by just this problem.
DisinflationA decrease in the rate of inflation. This is different from deflation, although disinflation often precedes deflation. Disinflation, though, can be good if it means that inflation is slowing down and purchasing power is returning. It can be bad, of course, if it signals a shrinking in the economy.Reflationincreasing the rate of inflation, which is often used as a way of boosting the economy. Keynes recommends government stimulus as a good example of reflation. Hayek liked reducing taxes as a way of increasing spending.
Subflationwhen the cost of the dollar goes under the cost of goods. For example, you buy the DVD for The Crow because it was so much cheaper than the Blu-ray, but then you realize the movie isn’t that good in either format and feel bad about it.
Conflationif the amount of the money supply increases with the value of the goods. For example, a gallon of milk is worth $3, but then zooms to $6, but the value drops in half so that it remains $3. You wouldn’t even notice. In fact, although this happens all the time, you never notice it at all so it isn’t even worth thinking about.
Exflationthe dollar value drops just after you assess its value. For example, you know how you bought a full tank of gas at $2.25 a gallon, only to see it drop the next day to $2.03 a gallon? You feel exflated.
Rotasubteriflationwhen the value of the dollar is thrown under bus.
Interflationwhen the value of the dollar stays the same, but the value of the quarter and nickel increase, even though the value of the dime and penny decrease.
Preflationthe value of the dollar goes up just before anything else does. Even though the Czar made this term up, even he can’t think of an example.
Postflationthe opposite of preflation. You figure if you can have preflation, it follows there must be postflation. Your guess is as good as ours.Monoflationthe value of only one dollar goes up out of a bunch.
Heteroflationnothing, but it sounds really smart. Imagine you, at your next cocktail party, saying something like, The real concern in the money markets is heteroflation, and its anodyne effect on long-term debt. Jeez, doesn’t that sound awesome?
Unflationwhen you come up with a list of gags, and realize the list has gone on way too long and you better end it right here.
Божію Поспѣшествующею Милостію Мы, Дима Грозный Императоръ и Самодержецъ Всероссiйскiй, цѣсарь Московскiй. The Czar was born in the steppes of Russia in 1267, and was cheated out of total control of all Russia upon the death of Boris Mikhailovich, who replaced Alexander Yaroslav Nevsky in 1263. However, in 1283, our Czar was passed over due to a clerical error and the rule of all Russia went to his second cousin Daniil (Даниил Александрович), whom Czar still resents. As a half-hearted apology, the Czar was awarded control over Muscovy, inconveniently located 5,000 miles away just outside Chicago. He now spends his time seething about this and writing about other stuff that bothers him.