Posts Tagged ‘inflation’

How can five percent unemployment possibly be a good thing?

Thursday, November 19th, 2009

For an individual, being unemployed when you desperately need a job is never a good thing. However, a little unemployment in an economy is not necessarily a bad thing. First of all, some people don’t want to work – at least not in jobs that get listed on tax returns like stay-at-home moms and dads. That’s called voluntary unemployment, but it really shouldn’t even be counted in unemployment statistics. There are also always going to be people who are between jobs – having just left one job and waiting to start another, but not in real danger of long-term unemployment or desperate to find work. Economists call that “frictional unemployment.” Even if everybody who wanted a job had one, there would still be some “frictional” unemployment as people transitioned between jobs.

In reality, however, it’s extremely rare that every single person who wants a job is employed. Unemployment moves up and down in a cycle along with the rest of the economy and, while increased unemployment in a minor economic downturn is not a good thing, it isn’t an economic death knell. Some people will also be involuntarily unemployed because of structural unemployment – unemployment that happens because wages (the price of jobs) can’t change with demand or the right types of employees aren’t available for existing jobs.

Structural unemployment can be lowered in the short term by sparking inflation, but the unemployment goes back to its previous rate, so trying to push the unemployment rate below a certain level tends to make the economy unstable. Milton Friedman, who won the Noble Prize for Economics in the 1960s, called this level “natural unemployment” or NAIRU (the non-accelerating interest rate of unemployment). It’s the level of unemployment in an economy at which prices and jobs are stable. The NAIRU for the United States in the past two decades has been about 5%, and for most of that time, the economy has been quite healthy.

So, it’s not good if YOU are unemployed (assuming you want a job), but unemployment is a natural, unavoidable part of any economy.

Real Loss is…

Thursday, November 5th, 2009

Real loss is a financial loss whose value is adjusted for inflation. For example, if an investor lost $2,000 on the stock market 20 years ago, and inflation has risen 25% since then, the real loss is 25% smaller, or $2,500.

If we need more money, why can’t the government just print more?

Sunday, October 18th, 2009

That could work, but then again, it might not be so simple.

Until 1971, the U.S. dollar was backed by gold and silver. That means that you could bring your dollar to a bank and redeem it for one dollar worth of gold or silver. Today, the dollar is backed by the strength of the U.S. economy and the size of its GDP. But for explaining purposes, let’s say it’s backed by marbles.

Let’s imagine you have five dollars and those are worth five marbles. To buy a marble, you need one dollar. If you print another five dollars without somehow producing another five marbles, your extra dollars aren’t really backed by anything. Basically, now your ten dollars are only worth five marbles and to buy one marble, you need two dollars. This is called inflation.

Now let’s say you owe your friend five dollars for the five marbles that she gave you last week. Unfortunately, you don’t have five dollars to pay her. If you print five dollars, then you can pay her what you owe but she will end up with dollars that are worth less. However, as long as we are producing more marbles, we can print more money because it has something to back it. In the U.S. we pretty much trust the Government to make sure we have the marbles to back our dollars. So when they print more money, we trust that the GDP will grow to match it.

Printing money may help us pay old debt but in the end, without a strong and growing economy, it does more harm than good by making all of our dollars weaker and forcing prices up.

What do we learn from all this? Printing more money doesn’t help us in the long run unless whatever is backing our money is growing too.

Real Gain is…

Wednesday, August 5th, 2009

Real gain is a financial gain whose value is adjusted to reflect inflation rates. For example, if you made a $100 profit five years ago and inflation has risen 10% since then, the real gain on that profit is 10% less, or $90.

Inflation is…

Tuesday, June 9th, 2009

Inflation is a rise in general price levels that causes the value of your money to decrease.  In other words, if you can buy a bag of groceries for $25, inflation is when that same bag now costs $35.

Deflation is…

Friday, May 15th, 2009

Deflation occurs when an entire economy of people stop buying as much as they once did, forcing the price of goods to drop. In numbers, an economy enters a state of deflation once the inflation rate (normally 3%) drops below zero.