After seeing some severe ignorance about Inflation in some threads, I have decided to post about this topic, since after all we shall see 50%-500% inflation over the next 5 years imho.

Inflation is the devaluation of money versus product. In lay mans terms it means you need more money for the item you wish to purchase than a previous time, and not due to some one trying to make profit.

Now some people seem to be under the impression that some inflation is not bad. I shall rectify this entire sentiment in any rational beings who read this post.

Inflation typically is a very low number per year in the United States, notable exceptions being the Great Depression and the Carter Years. Now we can add the Obama Years to this list.

This low number while seeming to be harmless is in fact a dangerous situation.

But first I think I need to list sources of inflation, yes there is more than one source to create inflation.

The first source is the total money available at a given time. If this source increases then a quick and dry analysis is going to show more money = less value. Of course you do have to deal with the location of the cash, therefore when I quote inflation to people I am generally using cash within this nation as a reference, removing cash from outside as a factor for the moment.

Now not always does this cash have an immediate effect, it must, in a sense, trickle from who has gained the cash to society in general. If this person slowly introduces it then the effects take longer to be noticed, if he splurges he may trigger inflation immediately.

The second source of inflation is by far more insidious and dangerous. This is through unbalanced payroll raises. If Group A gets raises, but no cuts in wages somewhere else occur, then the net result is an inflationary pull. This is best exampled with New York City and the Bay Area of California.

The third source of inflation is unique, it is fad buying. In this situation supply is outstripped by demand and the price of the item goes up, even though it is a temporary issue. However long term harm can occur with the development of fad buying on a product.

The last source of inflation is run-away spending in some area's versus saving cash in other area's. This can create regional stressors that ultimately will cause inflation.

Now you are probably asking, why is inflation bad according to Einstein? Well here it is. Inflation tends to strike hard at those people who have less mobility in their pay raises, or pay at all than others. The smaller and more confined, who have not seen raises for a while, aka the working poor, are the most dramatically affected by such inflationary issues.

An example would be myself. Stuck at $10 an hour for a 8 year period (96 to 07 with a few years of no income from standard employment) I watched as the prices on many items rose. These price changes may seem small, to some, but incrementally they all added up to considerable levels. In effect cheese, which had been affordable, went through a fad buying stage, and with normal inflation became to expensive for my general consumption.

The people most effected, ergo, from inflation is the poor. Coupled with a non-adjusting taxation level they are cut both ways, if they get a higher income they lose more to taxes and they also watch as inflation eats away the difference rather quickly.

Run away inflation however is much scarier. Run away inflation to me is any inflation greater than 5%/ The problem becomes that people will want to make purchases to find the expenses are larger than expected. Written on companies this means they raise their costs to the buyers of their products/services. Some get caught short, and do not have the extra 5% needed. Typically this is smaller businesses, but larger business such as Circuit City as also apt examples. This means scaling down, unemploying some people, closing some locations, and raising prices to allow for their higher costs. At first this has only a small effect.

However it keeps cascading, since each move only increases inflationary results in general. Yes cutting interest rates will counter inflation, to a point, but if you do steps other than this key choice, you only create more inflation. Cutting taxes is the only other way to fight inflation, and this must be upon earners, not some welfare aimed at those not earning, or supplemental upon those working but under certain low rates where they receive more than they put in.

We are talking the rich, since they also buy and sell things, and even to each other. Inflation creates a situation where one is "caught with the bag" and is unable to afford their costs. They increase their prices to mitigate this, but then others in turn must increase their costs.

When you are talking about going from 5% to 10% in a rush, then things get deadly serious. This is the point where small businesses are no longer able to keep up with the increased prices on goods and start collapsing, some slower than others, but none-the-less collapsing. This is exceeding the typical 2-4% profit margins easily, and crippling them versus those larger businesses able to easier absorb big costs.

A good example of this is Walmart versus 7-11's. A typical Walmart has multiple loading docks, a central warehouse to hold goods and to make sure shipments get sent as needed. No space is wasted in the larger semi-trucks transporting from the warehouse to individual store, nor is fuel being excessively consumed for the amount of cargo being carried.

However a 7-11 has multiple shippers, no central warehouse, and each shipper comes in a smaller, and less fuel efficient, vehicle. Most vehicles will have multiple stops where they give up a portion of the cargo as well. This is both cost and time inefficient. Therefore this is why normally 7-11 has higher costs to consumers than Walmart. However under inflation this effect is bell curved, in favor of Walmart and against the 7-11.

This example is supposed to show you how small businesses suffer under inflation.

Now lets look at the future of our nation.

Inflation is going to average 1 to 100% a year over the next five years, tending more to about 60% a year. You get paid every two weeks. Assuming your employer some how can keep giving you a raise is bad business. However lets assume he gives you annual raises in line with inflation.

Year number 1 you are making a fictional $12,000 (To keep the math simple). Inflation is 50% over that year. You earn $1,000 a month this year. Inflation is 0.4167% a month. Now for the sake of argument lets say your expenses are $900 a month, leaving you 10% to do as you wish with. 

The first month expenses will increase to a mere $903.75. This does not seem that much. However at the end of the year this is now $945 a month in expenses. Your net 'spare income' has nearly dropped to half of what it was.

For those with margins much lower than 10% spare income, this can be catastrophic.

But you say "rent is stable, only food, gas, electricity and the likes will rise".

True at first, but suddenly at the end of the contract do not be surprised to see the rent adjust to inflation, and your contracts to be much shorter.

AND also expect them to try to make up for the lost difference, they must after all feed their families, they likely had to take out a ruinous loan to offset the difference due to inflation, which across a number of units can add up very fast.

But now the uneducated will say 'they are rich anyhow, with so much property'. Well they might seem rich, but they still have a "margin" they live inside of also. They just have assets worth a certain value, which bring in a specific amount of cash. Subtract from this cash the upkeep of those assets and they really are not income rich as you would think versus their asset values. So perhaps they make 15% spare income versus expenses, and they usually invest most of this in new purchases to help further their efforts to protect their retirement (When they will sell the property to fund their retirement). Now they are faced with higher costs to try to maintain, and higher costs to expand. Maintaining ultimately for most business types means less products, which will sell for higher prices, which increases inflation.

An example? Ok sure.

Lets create a LED light bulb type company, one which offers flashlights, lights for housing, lights for stop lights, and so forth. We are diversified to prevent anyone type of business market shrinking from affecting us.

We now however are faced with suddenly to much of our product, and our suppliers of the parts we purchase to put our lights together, for us to maintain. This is due to the amount of money the government created and stimulus efforts they said would help. Since we are a cornerstone type business to that development we now are the front line of inflation. Our suppliers, overwhelmed raise prices 5%. We now have to raise our costs that much just to get the parts. However then the other issue, we now have to raise costs because to many places are ordering, and we need to expand asap to adjust to the future business. We just went up 5% on our own as well then. Now our costs are 110.25% of the original cost. This effects the government who sadly understand we cannot keep up and why we raised prices, so now they need an additional 10% to the funds they created from no where.

Now the shipping company gets hit with the business, and must expand. It seems there are only so many trucks which can handle the light poles, the gases we use, and otherwise. They raise their prices 5%.

Then the installers who ultimately put the stuff in also need to purchase more drills, more welders, more screw drivers, more trucks, more everything... 5% more there to.

Inflation leads to inflation leads to inflation.

Unions demanding higher wages are actually inflationary. The best way for it to work would be to have fixed numbers of spots per pay bracket, with the brackets never changing in value. Performance would allow upwards movement or result in downward movement, and sometimes the only way to advance would be to allow someone time to retire and compete for their spot.

However fads also create inflation and they are harder to manage.

The things we can more easily control are taxation policies, interest rates, and monetary creation.

Reducing taxes on the rich and businesses helps via leaving them their margins when the inflation is occuring, leaving them to not need to adjust their prices. Simple math, if you are paying 40% in taxes, and make 100%, and your normal profits is 5%, inflation is 5% (of the 100%, not the 95%), taxes get cut by 5%, your still making 5% profits and do not feel the need to change prices.

Interest rates is a unique example. See the problem is in credit. If the credit interest rate is very high it costs more to upkeep it. If this is suddenly cut then the cost is reduced, and you have more free money with which to avoid a cost increase. HOWEVER I WILL NOTE THIS IS NOT GOING TO BE AVAILABLE IN THE COMING INFLATIONARY PERIOD DUE TO THE SLASHING OF INTEREST TO 0%-0.25% ALREADY!!!!! So you can count this tool out when considering this.

Printing more money only makes for more spending which increases inflation. Printing less could help, except when will our government ever start spending radically less?

Oh and shoving the debt burden off to the future wont work much longer. This is because trust in the dollar will weaken. People invest still in Japan because the worker there WORKS HARD AS ALL HELL to make sure his company succeeds. Here we have a plague with indifference if our companies fail, and even an attitude of punishing the ones who succeed and pay their CEO's good for succeeding. Investors realize this so your screwed, I am screwed, we are all screwed.

However I have seen one way to protect cash assets in the coming storm, not gold which I think will tank hard when the recession ends, worse than any existing bubble ever was. I am offering this information to Conservatives and people who actually think with their brain instead of their emotions if they message me in #1579 (Empire name: Commander) without cost or anything, just a promise not to blather it about to everyone because it will only work if only a small percentage of society knows of it, those who know already, and those who will learn of it prior to it being to late.