NationStates Jolt Archive

Well the Bush Admin and conservatives in general keep saying that the economy is rockin with Dokken. The US's outlook has never looked so good and we are heading toward a golden age of riches for all.

So why then are 1 in 8 US Americans poor (http://news.yahoo.com/s/nm/20060829/ts_nm/life_usa_poverty_dc)? Why is the gap between rich and poor growing tremendously. Why is the percentage of people with health insurance lowering. People like to point to the number of jobs held and say look how low unemployment is. Yeah, low wage jobs that are impossible to decently survive on.

But the poor in the US have it way better than the poor in Africa, right. Thats true, but we can't compare ourselves with 3rd world countries. The poor in the US have a car and a color television with cable and a computer. Well when you are workign two jobs you need a bit of entertainment, plus all that stuff is on credit for the vast majority. ANd they NEED that car because of the way US cities and towns are organized - especially with our lack of a good public transport system.

I dont understand how inflation gets so out of control... is it because CEOs are making 1000 times the wages their employees are making? Their pay skyrockets while the poor are demonized as being lazy as they work their asses off just to survive paycheck to paycheck and splurge a tiny bit on entertainment to keep themselves from going insane from all the pressure.

We as a country need to learn how valuable those lowly workers that keep our country running are and supply a living wage to them while possibly figuring out a way to limit skyrocketing CEO salaries. Sure they work hard and deserve a lit of money but having employees making $9/hr while they make $600,000 plus a year is not just poor business sense, its criminal. You will probably say that if the employees dont like it they can go somewhere else. yeah they can and make comparable salaries. whoopity doo

I'm glad that the SEC is trying to make CEO salaries transparent - It's possible that it might help keep keep salaries lower or else I can see teh shareholders getting mighty pissed.

I dont understand how inflation gets so out of control... is it because CEOs are making 1000 times the wages their employees are making?
No, that has absolutely nothing to do with inflation. Anyone who tells you otherwise is either an idiot, a liar, or a lying idiot.

Inflation deals with the lower purchasing power of currency normally brought on by the government printing more money (out of thin air). It has nothing to do with how much a CEO makes. Nothing at all.

The economy is doing well, but we need to channel that growth so that it reaches the bottom as well as the upper 50% (of that, most is concentrated in the top 75%). Many good jobs are being created and are available, but we have to make sure that the poor who are willing to get the skills to have them are as able to as anyone else; salaries are soaring and job opportunities are available to those who have the skills to get them, but many of the people at the bottom can't get them.

There are some good things, however. Poverty may be 12.7%, but that's still far lower than its levels from 1979-1998; we have made progress on eliminating poverty, especially for children but there's a lot of work to do. Also, poverty has declined in relative terms with a poor person today having a far higher standard of living than they did in 1979, 1973, or any time before that. The problem we have isn't severe poverty, but rather that many poor people can't get out of poverty and it creates structural inequality in the economy.

A correction: CEOs don't make 1000 times more than the average worker; it's still pretty high at 262, but that's still lower than the levels in the late 90's when it was between 280-500. However, executive compensation is mostly stock options; their actual salaries are much lower, so their compensation will fluctuate depending on how well company stock performs. A booming stock market is going to push executive compensation up along with the stock; however, since employees also have stock, that's not a bad thing because it improves their income and retirement funds.

Income inequality in and of itself isn't a bad thing; it motivates people to work harder to reach that level of income that the wealthy have. The problem is when income inequality becomes a barrier to moving up rather than the motivator it should be. For me, I've been fortunate to have parents who were able to get an education and earn the kind of money that gives me a high standard of living, but not everyone is that lucky. We should focus on giving everyone the ability to reach the top rather than handicap those who reach that level.

No, that has absolutely nothing to do with inflation. Anyone who tells you otherwise is either an idiot, a liar, or a lying idiot.

Inflation deals with the lower purchasing power of currency normally brought on by the government printing more money (out of thin air). It has nothing to do with how much a CEO makes. Nothing at all.

Trying to explain Economic theory to a liberal is just pointless.

They all believe that the economy's performance is 100% on the President despite the fact that the President has virtually 0 control over economic performance.

I mean, if liberals truly understood economics, they wouldn't be great fans of Marx.

Trying to explain Economic theory to a liberal is just pointless.

I would try to explain to you how to not be an uninformative dick, but that seems wasted on you likewise.

Inflation deals with the lower purchasing power of currency normally brought on by the government printing more money (out of thin air). It has nothing to do with how much a CEO makes. Nothing at all.

Too much growth in the money supply in general can cause inflation; an influx of precious metals as coins can be just as damaging as printing of huge quantities of fiat money.

The economy is doing well, but we need to channel that growth so that it reaches the bottom as well as the upper 50% (of that, most is concentrated in the top 75%). Many good jobs are being created and are available, but we have to make sure that the poor who are willing to get the skills to have them are as able to as anyone else; salaries are soaring and job opportunities are available to those who have the skills to get them, but many of the people at the bottom can't get them.

There are some good things, however. Poverty may be 12.7%, but that's still far lower than its levels from 1979-1998; we have made progress on eliminating poverty, especially for children but there's a lot of work to do. Also, poverty has declined in relative terms with a poor person today having a far higher standard of living than they did in 1979, 1973, or any time before that. The problem we have isn't severe poverty, but rather that many poor people can't get out of poverty and it creates structural inequality in the economy.

A correction: CEOs don't make 1000 times more than the average worker; it's still pretty high at 262, but that's still lower than the levels in the late 90's when it was between 280-500. However, executive compensation is mostly stock options; their actual salaries are much lower, so their compensation will fluctuate depending on how well company stock performs. A booming stock market is going to push executive compensation up along with the stock; however, since employees also have stock, that's not a bad thing because it improves their income and retirement funds.

Income inequality in and of itself isn't a bad thing; it motivates people to work harder to reach that level of income that the wealthy have. The problem is when income inequality becomes a barrier to moving up rather than the motivator it should be. For me, I've been fortunate to have parents who were able to get an education and earn the kind of money that gives me a high standard of living, but not everyone is that lucky. We should focus on giving everyone the ability to reach the top rather than handicap those who reach that level.

I agree. The economy looks excellent where I live, and there's no sign of any major changes here.

I agree. The economy looks excellent where I live, and there's no sign of any major changes here.

The economy's doing quite well especially when you consider that the 400% increases in oil prices in 1973 or 1979 brought stagflation, gas lines, and 11% unemployment (along with 17% poverty). And that was without a terror attack, major stock market crash or the collapse of several major corporations. Honestly, many of the economic indicators are as strong as they were in the mid and late 1990's.

Even inflation is pretty tame; at 4.2% (it'll be lower once the new CPI data comes in) it's still at or below the average levels of the 1980's, and core inflation is at the same levels as it was in the 1990's with $10 oil and $1.50 natural gas. Now that oil prices are falling again and appear to be in a longer term downtrend we might see even stronger growth with reduced inflation over the next few years.

I agree. The economy looks excellent where I live, and there's no sign of any major changes here.

What is that over there? Is that a forrest? I can't tell, it is obscured by all these tree looking things.

Trying to explain Economic theory to a liberal is just pointless.

Bullshit.

They all believe that the economy's performance is 100% on the President despite the fact that the President has virtually 0 control over economic performance.

Bullshit again. As a liberal myself, I knew this already. I agree that the government has fairly little control over economic performance, although there are things they can do to alter it (usually for the worse, but alteration nevertheless).

I mean, if liberals truly understood economics, they wouldn't be great fans of Marx.

I would say it again, but I think that twice is enough. If you replaced liberals with communists in that sentence you might have a point, although they likely wouldn't see it that way due to valuing equality above economic growth.

But accusing all liberals of being communists? That strikes me as the kind of stupidity generally only found in single-celled organisms.

lib‧er‧al‧ism  /ˈlɪbərəˌlɪzəm, ˈlɪbrə-/
[lib-er-uh-liz-uhm, lib-ruh-]
–noun
1. the quality or state of being liberal, as in behavior or attitude.
2. a political or social philosophy advocating the freedom of the individual, parliamentary systems of government, nonviolent modification of political, social, or economic institutions to assure unrestricted development in all spheres of human endeavor, and governmental guarantees of individual rights and civil liberties.
3. (sometimes initial capital letter) the principles and practices of a liberal party in politics.
4. a movement in modern Protestantism that emphasizes freedom from tradition and authority, the adjustment of religious beliefs to scientific conceptions, and the development of spiritual capacities.


See any mention of communism or socialism in there? No? It would appear that you have been pwned by the dictionary.

In spite of the potential economic shocks that face the US economy as it currently is, it's doing a great job.

What is that over there? Is that a forrest? I can't tell, it is obscured by all these tree looking things.

Even on a macro scale the economy's doing alright. The real concern is in the long term with the retirement of the boomers and the subsequent labor shortage and tax shortfalls; unfortunately, the genius Republican leadership has savaged our tax base and burdened the government with trillions in underfunded entitlements and rising mandantory costs. In fact, the fastest growing cost in the federal budget is interest on our debt...it's already the second biggest expense.

It's even more concerning if you look at the numbers according to GAAP rules. Remember the $559 billion in surpluses in the late 1990's? Try a loss of $484 billion instead...and last year, it was at least a $760 billion deficit with up to $3.5 trillion if the new Medicare program was included. In 2000 it was $12.7 trillion and in 2004 $11 trillion...however, since the government uses cash accounting (a highly illegal form of corporate accounting used by companies like Microstrategy and Qwest to hide losses) it looks like we've halved the deficit.

Mortgaging the future to mollify voters today is dangerous...unfortunately, Bush and Co. don't see it. I do, and that's why I will not vote Republican in 2006 or 2008...we need a party committed to fiscal responsibility to repair the damage.

Trying to explain Economic theory to a liberal is just pointless.

They all believe that the economy's performance is 100% on the President despite the fact that the President has virtually 0 control over economic performance.

I mean, if liberals truly understood economics, they wouldn't be great fans of Marx.


Wow. That is probably the dumbest thing you have said to date.

Too much growth in the money supply in general can cause inflation; an influx of precious metals as coins can be just as damaging as printing of huge quantities of fiat money.


Aren't there automatic responses to that as in pulling them out of circulation?

Mortgaging the future to mollify voters today is dangerous...unfortunately, Bush and Co. don't see it. I do, and that's why I will not vote Republican in 2006 or 2008...we need a party committed to fiscal responsibility to repair the damage.

Unfortunately, the Dems are less responsible with the budget.

Too bad we don't have a strong Libertarian Party.:( I bet if one existed, it would outdraw both the Republican and Democrat parties.

Too bad we don't have a strong Libertarian Party.:( I bet if one existed, it would outdraw both the Republican and Democrat parties.

Gee could it be because of the way you guys talk?

I mean, if liberals truly understood economics, they wouldn't be great fans of Marx.

Which liberals are great fans of Marx? Please do point them out.

Aren't there automatic responses to that as in pulling them out of circulation?

Yes, that's effectively what the Fed does when it raises interest rates or increases the reserve ratio. The physical currency is a very small part of the money supply; only about $700 billion is actual bills or coins, compared to nearly $10 trillion in all other forms like checking accounts, small time deposits, and large time deposits like loans or CDs worth more than $100k.

However, when the government has to resort to printing money to pay its debts it's usually in crisis mode; they can't afford to pull money out of circulation because they need every bill they can print. It usually happens in a war or similar crisis that requires a lot of money that bonds and taxes can't cover.

If you ever hear that the US can no longer sell its debt and has to print $2 trillion in bills to finance the government, I'd advise you to consider leaving the country because the shit has hit the fan and you'll be seeing 1920's-Germany style inflation soon.

Unfortunately, the Dems are less responsible with the budget.

I mean split-congress; preferably a 50/50 or slightly Republican congress with a Democratic president. Gridlock is the only way we will balance the GAAP budget and save entitlements from default.

The US economy is strong and growing. Unemployment is half that of Europe and the markets are up. This is in part a result of taxes cuts. People wanna say "oh well people are poor" Know what poor in America means compared to the rest of the world? Fucking rich. And IDF is right, the President has no impact on the market, hence why its called the free market. If he did influence it itd be close to communism.

People wanna say "oh well people are poor" Know what poor in America means compared to the rest of the world? Fucking rich.

By what standard would you make that comparison?

By what standard would you make that comparison?

Even if your living on min. wage in a crappy rent controlled apartment in the worst part of town somewhere you are still a hell of a lot better off than if you were in say Kenya.

Even if your living on min. wage in a crappy rent controlled apartment in the worst part of town somewhere you are still a hell of a lot better off than if you were in say Kenya.

Why? Have you lived on minimum wage for an extended period (your allowance doesn't count)?

Or have you lived in Kenya for an extended time?

Please, do share your experience with the rest of the class.

The U.S economy is fine. Not as strong as it used to be, but its fine.

I think it's important to note that the poverty rate fell in the report and is falling again, and real household income rose 1.1%; these are small gains, but when we consider that inflation has been elevated and there have been significant shocks to the economy over the past few years it's rather remarkable.

It's even more important to note that this is the first time since 2000 that the poverty rate fell, and income has posted its first increase since its 1999 peak. These are good signs for the economy, and I think they're going to accelerate.

The U.S economy is fine. Not as strong as it used to be, but its fine.

It's about average for an expansion; some indicators are better and some are worse. I'd say beyond a doubt that it's better than the mid to late 1970's, early 1990's and 1980's but worse than the mid to late 1990's.

It's a solid expansion...not roaring but not weak either.

Never mind less capable people getting less money for their time...what's up with those saving figures?

Never mind less capable people getting less money for their time...what's up with those saving figures?

The statistic has a bit of a distortion in it. More and more people are retiring and are starting to draw from their retirement accounts, and that money is counted in personal spending but not personal income. As a result, anyone who is drawing money from a retirement account has a negative savings rate; as more people retire, a bigger share of personal spending will come from retirement money and that will push the rate lower unless income grows a lot faster than it has, and most likely a lot faster than its average rate over the past few decades.

Debt-to-income and consumer credit growth is actually falling and has been declining steadily since 2002; the consumer is not as indebted relative to income as they were then, and growth in real income is going to push that level lower as consumers make real gains and inflation reduces the value of their debt. The negative savings rate doesn't seem to be reflected in consumer credit numbers or debt burden numbers; that's why I think it has more to do with retirees than anything else.

Unfortunately, the Dems are less responsible with the budget.

Too bad we don't have a strong Libertarian Party.:( I bet if one existed, it would outdraw both the Republican and Democrat parties.

Don't count on it skippy.

ven if your living on min. wage in a crappy rent controlled apartment in the worst part of town somewhere you are still a hell of a lot better off than if you were in say Kenya.
A c-note says you couldn't even find Kenya on a map.

I think it's important to note that the poverty rate fell in the report
In all, some 37 million Americans, or 12.6 percent, lived below the poverty line, defined as having an annual income around $10,000 for an individual or $20,000 for a family of four. The total showed a decrease of 90,000 from the 2004 figure, which Census Bureau officials said was "statistically insignificant."
90'000 out of 37'000'000, that's a decreas of 0.2%. I doubt, that the counting methods of the census bureau are precise enough to be able to detect such a change. If you have changes < ~1%, then you have to look at a longer time span. And if you do that, then you discover that in 2000, pverty was at 11.3%, and in 2005 at 12.6%.
Conclusion: you can say that the increase of poverty has stopped in 2005.

No opinion is given in this post.

The negative savings rate doesn't seem to be reflected in consumer credit numbers or debt burden numbers; that's why I think it has more to do with retirees than anything else.
Nevermind the statistics, the question is where the actual money is going to come from.
Whether or not people have personal funds available or not doesn't matter nearly as much as the question where the investment for future capital purchases comes from. And if the answer is 'from outside', that has all sorts of implications.

In the late 19th century, US savings rates were more than double what they were anywhere else. That's what created the funds needed to make the US as powerful as it his today.

90'000 out of 37'000'000, that's a decreas of 0.2%. I doubt, that the counting methods of the census bureau are precise enough to be able to detect such a change. If you have changes < ~1%, then you have to look at a longer time span. And if you do that, then you discover that in 2000, pverty was at 11.3%, and in 2005 at 12.6%.
Conclusion: you can say that the increase of poverty has stopped in 2005.


That's correct; however, I do call it a decline because of the way poverty rates have performed historically. I'm looking at the trend for poverty rates, particularly the 1990 recession when poverty rose from 1989-1993 and then began to decline. Whenever poverty stops growing and levels off, it begins to decline until the next recession; usually, it starts to increase in the year prior to the recession and lasts for about 3 years after it ends.

It's a good sign; not a significant move on its own but the beginning of a trend.

In the late 19th century, US savings rates were more than double what they were anywhere else. That's what created the funds needed to make the US as powerful as it his today.

Good question; I personally think it's going to come from places where savings rates are still elevated, especially Asian nations like China where a consumer economy is still developing. Since the economy is becoming increasingly globalized, people in China will be able to use their funds to buy products and establish businesses around the world.

Another issue is that people aren't saving money because they want things now rather than later. It's not because of economic difficulty, it's because they want all kinds of new products now and don't want to build up savings because that would eat in to their purchasing power. In many ways it's a lifestyle choice more than anything else.

@Vetalia: I just enjoyed this civilised discussion on the otherwise rather trolly NSG, and wanted to prevent use of falsely interpreted data - you're of course free to extrapolate other historical data.

Another issue is that people aren't saving money because they want things now rather than later. It's not because of economic difficulty, it's because they want all kinds of new products now and don't want to build up savings because that would eat in to their purchasing power. In many ways it's a lifestyle choice more than anything else.

How do you know that?

Too much growth in the money supply in general can cause inflation; an influx of precious metals as coins can be just as damaging as printing of huge quantities of fiat money.
This is true. However, there are sufficient market forces to level it off (people can keep more coin and thus the supply drops). However, with fiat money--the sky's the limit.

It could almost be possible that the big, bad monster of US capitalism is finally starting to stagnate and evolve into a caste system w/ a rift between the rich and poor going wider, w/ each caste getting more and more developed into 1 form, thus unemployment falls as more ppl get into the lower caste.

How do you know that?

Because other indicators are not moving in ways that would suggest it. The poverty rate is lower, real household income is up, retail spending is at or above trend and durable goods orders are strong for appliances and consumer goods.

For example, retail sales data reflects 3.0-3.3% real growth year over year in expenditures at restaurants, computer/appliance stores and 5% on household furnishings. People are not only buying appliances, restaurant meals, and furniture at steady rates but are buying more each year. Also, the rate of sales at restaurants is growing faster than the rate of sales at grocery stores, suggesting people are not only eating out more often but are going to restaurants as a bigger share of their food expenditures.

Also, a bunch of "soft" indicators like consumer confidence are also supporting this. For example, even though 65% of people in the Consumer Comfort survey rate the economy as average or poor, 68% of those same people rate their own finances as "good" or "excellent"; there is a disconnect between perceptions and actual spending activity.

This is true. However, there are sufficient market forces to level it off (people can keep more coin and thus the supply drops). However, with fiat money--the sky's the limit.

Fiat money issued alongside precious metals often causes hoarding of gold and silver, which in turn leads to deflation once the fiat currency is withdrawn and the economy returns to a gold standard for its paper currency (as it did in the post-Civil War US) or paper currency is retired entirely (as it did in China during the post-Song and post-Yuan dynasty periods).

Fiat money can be properly managed if its growth rate is kept fairly constant and the government maintains a balanced budget. (You only run in to problems when the economy is flooded with money, and then the money is withdrawn to stop inflation, which in turn causes another recession necessitating a new flow of money, ad infinitum).

Fiat money issued alongside precious metals often causes hoarding of gold and silver,
Gresham's Law, in a way.


which in turn leads to deflation once the fiat currency is withdrawn and the economy returns to a gold standard for its paper currency (as it did in the post-Civil War US) or paper currency is retired entirely (as it did in China during the post-Song and post-Yuan dynasty periods).

Fiat money can be properly managed if its growth rate is kept fairly constant and the government maintains a balanced budget. (You only run in to problems when the economy is flooded with money, and then the money is withdrawn to stop inflation, which in turn causes another recession necessitating a new flow of money, ad infinitum).
The problem is that such requires a very large "if".

Trying to explain Economic theory to a liberal is just pointless.

They all believe that the economy's performance is 100% on the President despite the fact that the President has virtually 0 control over economic performance.

I mean, if liberals truly understood economics, they wouldn't be great fans of Marx.

If you understood liberalism in any shape or form, you will find they are very much not in favour of Marx. Those who are are called socialists.

Gresham's Law, in a way.

That's correct. It happens whenever people lose faith in the ability of the issuer to protect the value of their currency; it can even happen when the value of the metal in a coin is significantly greater than the denomination, as it did in the US with the ill-fated silver trade dollar or the gold coins issued in the early part of the 19th century.

The problem is that such requires a very large "if".

Central banks can do a decent job of managing the economy, but it comes at the cost of a steadily and rapidly depreciating currency. They're good enough at managing fiat money to prevent hyperinflation, but not good enough to keep it from depreciating as rapidly as it does.

Really, the only way it would keep its value is if the money supply was always kept constant and the central bank did next to nothing to affect the money supply. Of course, that removes much of the purpose of the central bank other than as the backer of the currency issued.

Your conclusion that the United States economy is in trouble in unfortunately very true, but your reasoning is way off - you clearly haven't much of a background in business or economics.

The rate of inflation is up primarily because of two things - interest rates and oil prices. The skyrocketing price of oil, and thus of gas, has thrust up costs and prices in every part of the economy, from the daily expenditures of your average family to the shipping and manufacturing of major companies, leading to inflationary pressures.

That's one piece. Combined with that is the older inflationary impetus of the monetary policies implemented by serial bubbler Alan Greenspan after the popping of the tech and stock bubbles and subsequent recession, which essentially consisted of rock-bottom interest rates to encourage consumers to spend by going into debt, with the bullshit-from-the-start caveat that the Fed would bring the economy in for a 'soft landing' later on.

Now that Greenspan is out and Bernanke is in, and the latter sees the rise in inflation rates due the price of oil and his antecedent's monetary policy, and is forced to rapidly increase interest rates to combat these pressures, leading to an outcome that may be far from the 'soft landing' predicted earlier in the decade.

Related to this are the housing, and more hypothetically, credit bubbles which are being hotly discussed as possibly soon to pop. I say related because the former is a direct and explicit result of post-nineties monetary policy, and the latter is the sum of nearly 4 decades of debt and credit fetishism accelerated by the policies of the last 6 years. If this happens, especially the latter burst, all hell breaks loose economically speaking. Housing values and consumer assets and buying power plummet, debt and credit structures fall apart everywhere as their root companies go bankrupt underneath them, etc. etc.

This could have consequences even beyond major damage to our economy. Another possible result of such a catastrophic event could be a dollar sufficiently weakened that Asian central bankers and investors are scared away from it as a reserve currency, made more likely by the boost the recession of the US economy would give proponents of switching the pricing standard to oil away from the dollar and towards the euro, or a "mixed basket" of currencies, an action that would almost certainly precipitate the widespread rejection of the dollar as a reserve currency.

What this would mean for us, besides the impact on the value of the dollar, overseas investment and trade, etc. would primarily be the effect on our government, which more or less lives off of the aforementioned East Asian central bankers, because they buy our Treasury bonds and thus finance our massive fiscal debt. They go - the financing of the debt goes. And then we're really in trouble.

whew - man it was horrible trying to reply to this (or anything on the NS forums) yesterday - ok I have a bit to read - I knew Vetalia would be in here to clear things up for me :)

I was just in a poor mood yesterday and wanted to rant.

I really dont understand economics or inflation obviously but it has nothing to do with being a liberal, it has to do with my eyes glossing over whenever I try to learn about it. Can't someone write "The economy and inflation for dummies" please?

I know there is more to it than what I protrayed - but dont prices come up when people make more money? dont businesses try to take advantage of willingness to purchase things at higher prices because of a large enough segment of the population can afford those higher prices?

Free merc you are saying it is because of oil prices but inflation was high when fuel prices were low. I really dont understand the whole interest rates thing.

Here is a quick comment about inflation (those that know economics don’t get pedantic, I am trying to explain in simplified ‘not quite true but close enough to get the idea’ kind of way).

Inflation is basically when prices rise. So to understand inflation, you have to understand why prices are rising.

Prices of goods rise generally because costs are rising – this is through the cost of goods, cost of money, or cost of labor.

Goods (such as oil) costing more put pressure on companies to charge more to protect their profitability. While temporary spikes can usually be absorbed, prolonged high costs must eventually be passed on in the form of higher sales prices for the goods or services that company provides.

The cost of labor rising (this can be through new labor laws and regulations, a shortage of workers, or many other factors) again pushes the cost of production up. When an economy is doing well, unemployment falls so there is a higher job to worker ratio so companies have to compete for workers – generally by paying higher wages. Like rising costs of materials, this eventually forces companies to push their own price higher.



There is something called the Phillips curve which basically says that there is a tradeoff between employment and inflation – higher employment means higher inflation, lower inflation means lower employment. When government started trying to take this into account it caused a distortion in the economy which essentially broke this link (when people know about something it changes their behavior) but that general trend is still useful to know.

The cost of money (essentially the interest rate paid on loans) also has to be passed on to consumers. This is the one indicator that is used to control inflation.

Central banks are charged with controlling inflation – making sure it is within the optimal band for economic growth and stability (1.8% is generally considered the optimal rate). They do this by raising the rate they charge for what loans they make to banks – and thus adjust the prime rate banks have to charge their customers. When the Federal Reserve lowers the interest rate, loans are easier to come by so getting money to invest in improving or expanding the business is cheaper. Business picks up because they have expanded – thus buying new capital goods and hiring new workers. Additionally, government bonds no longer have as good of a return, so become a less attractive investment compared to investing in businesses. When the Federal Reserve raises interest rates it becomes less attractive to invest in expansion, and thus job creation and capital purchases slow resulting in slowing inflation.

Changing the prime rate alone is not an entirely effective tool (Japan has had a serious deflation problem, and once it got to 0% there was nothing more it could do). It is also why central banks are supposed to be politically independent because raising the interest rate too much will cost jobs, and politicians are afraid that will cost them their jobs.

Inflation is a good indicator of growth in certain sectors – currently that is across the board but a lot of that inflationary pressure is coming from the high cost of oil. The US has a current inflation rate of somewhere around 4.1% and a growth rate of somewhere around 3.3%. This is obviously not a good situation and inflation has to come down a lot, but the risk is that trying to curb inflation can have disastrous costs. Economic information is at least 5 months old when you factor in collection and analysis, and changes in the prime rate take a little while to filter into the general economy (the stock market reacts pretty much instantly, but the bricks and mortar world takes a while), so you are taking a wild guess where the economy is going to be next year. Sometimes you don’t adjust enough, and inflation stays high, but you can over-correct and put the brake on economic growth.

Once again I apologize for this post: it is not highly accurate but it gets the general idea across (and I do not feel like presenting a textbook’s worth of information with appropriate caveats – so this is just the gist of the matter).

I know there is more to it than what I protrayed - but dont prices come up when people make more money? dont businesses try to take advantage of willingness to purchase things at higher prices because of a large enough segment of the population can afford those higher prices?

The problem is, if you raise your prices and no one else does you will lose customers and market share, hurting profitability in the long run. Competition is one of the main reasons why we are not seeing high rates of inflation from the rise in oil prices; companies are preferring to invest in productivity or allow their profit margins to be eroded in order to underprice their competitors. That keeps prices down even though material costs are rising; unfortunately, this might also impede new hiring or investment by companies because they are sacrificing their surplus cash to keep their prices competitive.

That's one of the reasons why job and wage growth has been more muted in this expansion than in the 1990's. However, now that oil and other commodities appear to have reached their peak prices and are now declining due to rising production and slowing demand, it might mean greater hiring and investment. I don't think it's coincidental that the poverty rate and real income have both improved since the boom in oil and commodity prices started to decelerate.

Free merc you are saying it is because of oil prices but inflation was high when fuel prices were low. I really dont understand the whole interest rates thing.

Rising labor costs are a main cause of inflation, and labor costs always rise during economic expansions because the demand for workers is rising. Even if prices for raw materials are flat or falling (as they were in the 1950s-1973 period or the 1982-1999 period) these costs are still rising and companies have to compensate by raising prices.

Also, the cost of other things like health care are drivers of inflation. Health care costs as a percent of GDP and in nominal terms have soared over the past 4 decades and continue to as the population ages.

Inflation really isn't about rising prices (in the same way that deflation isn't really about falling prices). It's about currency expansion (or contraction, for deflation).

Free merc you are saying it is because of oil prices but inflation was high when fuel prices were low. I really dont understand the whole interest rates thing.

Inflation then was different. Economic developments from the post-Depression period all the way up to the late 80s and early 90s, including the uncontrolled surge of the economy post-WW2 and the arrival on the fiscal scene of Keynesian economics in the 70s and 80s, contributed to the so-called Age of Inflation, which was ended in the early-mid nineties by bipartisan alteration of fiscal and monetary policy that included both Clinton and the elder Bush. So, inflation back then was of different root than inflation now.

And also, remember that the last couple of years aren't the only time in recent decades that oil prices have spiked. The spikes in the 70s were again different from the current one, in that they were temporary reactions to major shifts in the market or global political scene, whereas the one of the present is a permanent and accelerating reaction to the approach of peak oil in various major sectors of global oil production, but they still existed.

Don't worry about interest rates and monetary policy; suffice it to say it's basically a mechanism through which the government manipulates consumer spending or saving and the value of money in order to influence the economy. In full, it's a helluva lot harder to explain than inflation.

Inflation really isn't about rising prices (in the same way that deflation isn't really about falling prices). It's about currency expansion (or contraction, for deflation).

Of course, but that's much more difficult to explain to an economics novice - prices are the simplest and most obvious indicator and effect of inflation.

Rising labor costs are a main cause of inflation, and labor costs always rise during economic expansions because the demand for workers is rising. Even if prices for raw materials are flat or falling (as they were in the 1950s-1973 period or the 1982-1999 period) these costs are still rising and companies have to compensate by raising prices.

Also, the cost of other things like health care are drivers of inflation. Health care costs as a percent of GDP and in nominal terms have soared over the past 4 decades and continue to as the population ages.

These two both touch on what I think is probably the biggest socioeconomic threat after fossil fuel dependency - the aging population and undereducated rising generations. It's the Agiz (reverse of Giza :) ) Problem in spades. We're transitioning to a pervasive knowledge economy in a time when the future workforce is in general undereducated for the jobs being created. I believe the statistic is that 60% of new jobs being created require skills possessed by only 20% of the workforce. This is compounded by the shrinking worker-retiree ratio, both in terms of the market and government programs like SocSec, that we are starting to see in the US, and which already strongly affects other Western nations like Italy and Japan.

Inflation really isn't about rising prices (in the same way that deflation isn't really about falling prices). It's about currency expansion (or contraction, for deflation).

That's correct. We see it reflected in rising prices but the real source of it is the expansion or contraction of the money supply.