I write about Politics and Current Events. Anything and everything economic, foreign policy, etc. will be covered.
What is Inflation?
Jerome Powell, the chair of the federal reserve, announced a new plan to keep inflation at steady 2%. Inflation is the decrease in value of the dollar. In other words, when you heard your grandpa mumbling about how when he was a kid, ice cream cost 5 cents, that's inflation. Ice cream isn't worth more then it was 50 years ago, the dollar is worth less. Generally speaking, a certain amount of inflation is natural and sometimes can even help the economy. However, too much inflation can be a sign of a recession or sometimes even a result of a recession. Inflation is a complicated subject which is difficult to grasp. More inflation means the amount of money you make doesn't go as far, increasing the poverty line. This can have many detrimental effects and serve as a drag on the economy. So why is Powell trying to purposefully devalue the dollar? The answer isn't as clean-cut as you might think.
What is Powell's plan and Why?
Powell wants to purposefully devalue the dollar. His plan is to keep Inflation at a steady 2%. But why would you purposefully devalue the dollar? Well, as Powell himself puts it “Many find it counterintuitive that the Fed would want to push up inflation, However, inflation that is persistently too low can pose serious risks to the economy.” According to Powell, when inflation is too low, many things can happen. Firstly, Interest rates would drop, leaving the fed less wiggle room to cut those rates. Secondly, it would mislead consumers. Inflation rates fluctuate and when inflation rates are low, consumers and businesses mistakenly assume that they'll stay low. This means wages and prices will fail to adjust for inflation. Powell claims that Inflation is currently too low, hurting the economy.
The Burn-Bond system
Let's set the stakes. In the status quo, the fed has been printing money like never before. The current recession caused by the recent Covid-19 out break has led to an unprecedented increase in government spending and thus the government has been printing more money. You would be forgiven for thinking that printing more money would cause inflation but the way that the fed is doing it prevents such a thing. The feds use a Burn-Bond system. When they print too much money and the economy gets unstable, they simply sell more bonds. This way, the government can control the amount of printed money in the economy thus controlling inflation. Too much inflation? Decrease the amount of printed money in the economy through bonds. Too little inflation? Print more money. Unfortunately, the feds want to ditch this tried and tested system. They want to print money and purposefully keep inflation above a healthy level. This could be the end of us all.
As previously mentioned, inflation can have dire impacts on the economy. As the value of the dollar decreases, prices increase, while wages stay the same. This increases the poverty line because people are now unable to afford many basic commodities. As a result of the current recession, hundreds of millions are in poverty with even more on the edge of the abyss. Keeping inflation at an unhealthy level for so long like the feds plan to do could push even more people into poverty and hurt the billions already in poverty. Even worse, because of trade linkages, almost every economy is effected in one way or another by the United States' economy. In 2008, the US faced an incredibly large recession, by 2009 the entire world was plunged into the recession. If the US increases the inflation rate, the resulting shock will be felt globally. The consequences of this plan will be massive. Millions if not billions in poverty, the economy nearly permanently altered. I urge all of you to proactively combat this impending economic downturn. Look to the future and find ways to make money online. This decision is one of the worst moves the federal reserve has made in a long time. I truly hope I am wrong, otherwise we might see the worst economic downturn in history, maybe even worse than the great recession.
Learn more about the plan
Dan Lehavi (author) from Los Angeles on August 30, 2020:
Thank you so much for reading! I'm not so sure about that but one things certain, you want to be prepared. Do everything you can to have as many streams of income as possible. you want to be stable.
Ken Burgess from Florida on August 30, 2020:
Great topic, not sure I agree with the back end of it as it pertains to this matter, but I am with you on the first half.
The dollar will be devalued, by how much in the next couple years is unclear... 20%.... 30%... more?
Last thing I want to have much of come November is money. I want property, stocks, assets of any sort... even Debt will be an asset, because whatever you get with that debt now, will be cheaper than what it will cost you in the future.