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All this spending - will it not cause inflation? And considering the weakness of the dollar, will the inflation not cause further weakness? And when American go

All this spending - will it not cause inflation? And considering the weakness of the dollar, will the inflation not cause further weakness? And when American goods become so cheap, considering that most manufactured goods are imported, will this not cause an exodus of capital? I really don't know, since I have no real understand of global economics.

anthonyrubin 18y ago
Don't fret, neither does anyone else.
thomaspaine 18y ago
There's a much bigger fear of deflation rather than inflation at the moment. Also, the dollar has actually been relatively strong since the financial crisis because there's been a large increase in the demand for safer assets, ie cash and treasury bills. A weakening dollar would probably be better for the economy as goods manufactured in America would be cheaper abroad, leading to an increase in net exports. I don't quite follow the reasoning of cheap American goods -> exodus of capital.
- profgubler 18y ago
  The problem with deflation is what is going to happen afterwards. My guess is hyperinflation. Once prices get so low, you will have a lot of people coming back into the market that have been hording dollars. Once they get back into the market you will have to many dollars chasing to few goods, since the world has slowed production. I really agree with you. That is why deflation is scary, it will likely lead to hyper-inflation.
  - shader 18y ago
    As far as I know, deflation cannot cause inflation. Maybe the governments response to deflation (print money!) can cause inflation, but the destruction of value and the reduction of the money supply cannot cause the overvaluation of assets or an expansion in the money supply, except through government action. Of course, it is true that hyper-inflation, if it happens, will happen quickly. People will be, as you say, hoarding their cash because of uncertainty. But when they become confident enough to borrow from the banks again, and the large reserves they have been stockpiling hit the fan, it is quite possible that people will quickly notice the change in money supply, and react by trying to get rid of their money too. Which would set off hyper-inflation. But this hyper-inflation is not caused by deflation, but rather by inflation, which people may not notice because of their presently high hoarding rate.
- shader 18y ago
  There are several major problems with inflation (meaning a vast expansion of the money supply through government spending, resulting in a rise in prices, and a fall in the value of the dollar): 1) That purchasing power went somewhere. Instead of going to what people wanted, though, it will have gone to what the politicians want, which is most likely a waste of resources. At the very best, the investments will be mostly harmless. 2) It doesn't just cause the exodus of capital, it practically is the exodus of capital: by printing money, they devalue all of the cash investments in the United States, thus reducing the amount of investable funds. While the foreign capital may be able to buy more dollars worth of goods per euro, there would be far less local capital to be invested. 3) While in theory the lower value of the dollar would make purchasing American goods more attractive to foreigners, that is often not the case. Just because a currency is cheap doesn't mean that items denominated in that currency are cheap. One example of this which I have experienced recently is the East Carribean Union dollar, which is worth much less than a US$, but where all of the items cost as much or more than they do here. Just because the currency is low in value doesn't mean that goods are actually cheap. Prices can rise to make up the difference, and often do. However, if the dollar becomes cheaper not due to inflation, but because of our continued trade imbalance then yes, your description of increased exports would be quite accurate. Trade imbalances aren't bad, and they can't last forever. What goes in must come out or accumulate. And in the case of dollars, accumulation causes a relative change in value. Supply and demand and whatnot. 4) Extreme inflation can cause instability, and reduce investor interest. No one wants to invest in Zimbabwe, because they are financially (and in other ways as well) unstable. Inflation is bad because it throws the future into question, and makes people less likely to lend money. If they do it is often at a higher interest rate. Also, deflation is not nearly as bad as many people think. Yes, dramatic and sudden deflation is just as bad for an economy as dramatic and sudden inflation. But an economy can get used to deflation just as well as it can adjust to inflation. In fact, it is almost a bonus, because it encourages saving, and thus investment and growth. I'm not saying that we should intentionally cause deflation, just that it's not a guaranteed cause of a death-spiral. The United States had a long deflationary period in the 1800s, and it was also one of the longer periods of high sustained growth. This will not always be the case, but there is little reason to be more afraid of deflation than inflation.

anthonyrubin 18y ago

Don't fret, neither does anyone else.

thomaspaine 18y ago

There's a much bigger fear of deflation rather than inflation at the moment. Also, the dollar has actually been relatively strong since the financial crisis because there's been a large increase in the demand for safer assets, ie cash and treasury bills. A weakening dollar would probably be better for the economy as goods manufactured in America would be cheaper abroad, leading to an increase in net exports. I don't quite follow the reasoning of cheap American goods -> exodus of capital.

profgubler 18y ago
The problem with deflation is what is going to happen afterwards. My guess is hyperinflation. Once prices get so low, you will have a lot of people coming back into the market that have been hording dollars. Once they get back into the market you will have to many dollars chasing to few goods, since the world has slowed production. I really agree with you. That is why deflation is scary, it will likely lead to hyper-inflation.
- shader 18y ago
  As far as I know, deflation cannot cause inflation. Maybe the governments response to deflation (print money!) can cause inflation, but the destruction of value and the reduction of the money supply cannot cause the overvaluation of assets or an expansion in the money supply, except through government action. Of course, it is true that hyper-inflation, if it happens, will happen quickly. People will be, as you say, hoarding their cash because of uncertainty. But when they become confident enough to borrow from the banks again, and the large reserves they have been stockpiling hit the fan, it is quite possible that people will quickly notice the change in money supply, and react by trying to get rid of their money too. Which would set off hyper-inflation. But this hyper-inflation is not caused by deflation, but rather by inflation, which people may not notice because of their presently high hoarding rate.
shader 18y ago
There are several major problems with inflation (meaning a vast expansion of the money supply through government spending, resulting in a rise in prices, and a fall in the value of the dollar): 1) That purchasing power went somewhere. Instead of going to what people wanted, though, it will have gone to what the politicians want, which is most likely a waste of resources. At the very best, the investments will be mostly harmless. 2) It doesn't just cause the exodus of capital, it practically is the exodus of capital: by printing money, they devalue all of the cash investments in the United States, thus reducing the amount of investable funds. While the foreign capital may be able to buy more dollars worth of goods per euro, there would be far less local capital to be invested. 3) While in theory the lower value of the dollar would make purchasing American goods more attractive to foreigners, that is often not the case. Just because a currency is cheap doesn't mean that items denominated in that currency are cheap. One example of this which I have experienced recently is the East Carribean Union dollar, which is worth much less than a US$, but where all of the items cost as much or more than they do here. Just because the currency is low in value doesn't mean that goods are actually cheap. Prices can rise to make up the difference, and often do. However, if the dollar becomes cheaper not due to inflation, but because of our continued trade imbalance then yes, your description of increased exports would be quite accurate. Trade imbalances aren't bad, and they can't last forever. What goes in must come out or accumulate. And in the case of dollars, accumulation causes a relative change in value. Supply and demand and whatnot. 4) Extreme inflation can cause instability, and reduce investor interest. No one wants to invest in Zimbabwe, because they are financially (and in other ways as well) unstable. Inflation is bad because it throws the future into question, and makes people less likely to lend money. If they do it is often at a higher interest rate. Also, deflation is not nearly as bad as many people think. Yes, dramatic and sudden deflation is just as bad for an economy as dramatic and sudden inflation. But an economy can get used to deflation just as well as it can adjust to inflation. In fact, it is almost a bonus, because it encourages saving, and thus investment and growth. I'm not saying that we should intentionally cause deflation, just that it's not a guaranteed cause of a death-spiral. The United States had a long deflationary period in the 1800s, and it was also one of the longer periods of high sustained growth. This will not always be the case, but there is little reason to be more afraid of deflation than inflation.