Understanding Finance from scratch

Chapter 38 In the past, a house could be bought, but today it is only worth a bottle of wine—Finance to be concerned about inflation (1)
Inflation and our lives
33年前，四川的汤婆婆往银行里存了400元钱，当年这笔钱能买1套房子、400斤猪肉、1818斤面粉、727盒中华香烟或50瓶茅台酒。今天，汤婆婆取出这笔钱，连本带息835.82元，仅够买420斤面粉、69斤猪肉、40盒中华香烟。

Inflation erodes our wealth virtually and affects each of us.So, what impact does inflation have on our daily lives as far as we can feel?

Speaking of inflation, everyone is familiar with it.In traditional textbooks, the description of inflation must be like this: Inflation is a social and economic phenomenon unique to the circulation of banknotes. When the circulation of banknotes exceeds the amount of currency required in commodity circulation, inflation will occur. Inflation, while the currency will depreciate and prices will rise.

Once synonymous with prosperity, Argentina's name originally meant "Land of Silver," perhaps because its capital, Buenos Aires, sits on the banks of the Rio de la Plata, which in Spanish means The middle is "the river of silver".Although the color of the river is turbid, there is a large amount of silver deposited in the upper reaches of the river. In 1913, Argentina became one of the 10 wealthiest countries in the world at the time. Even the president complained when he visited the central bank: "There is so much gold here that the aisles are impassable."

Yet just 60 years later, life has changed for Argentines. In the late 20s, Argentina’s inflation rate reached 80%. Inflation made everyone tremble. The main purpose of economic activities was to prevent inflation from swallowing everything. The society fell into extreme chaos...A province in Argentina even decided to issue its own currency — Patron, despite many people's concerns that this currency will not be accepted by businesses, the local McDonald's ingeniously launched the "Patronburg" combo: two cheeseburgers, one French fries, one drink.The once-wealthy country is gradually being overtaken by Singapore, Japan and even neighboring Chile.

Paper money is a pure currency symbol, it has no value, and it only replaces metal money to perform the function of means of circulation; the circulation of paper money should be limited to the amount of metal currency required in circulation, if the circulation of paper money exceeds the metal currency required in circulation If the amount of money is reduced, paper money will depreciate and prices will rise.Therefore, the currency depreciation and price rise caused by excessive issuance of banknotes are the direct causes of inflation.

An important feature of inflation is its very rapid conduction.The price increase of any part of the commodity will soon promote the price increase of other commodities through various channels.Take the current inflation in China as an example. First, the rise in food prices must be followed by a rise in wages.Wages play an important role in the production costs of various commodities, and the rise of this cost will inevitably lead to further rises in prices in China.

The increase in money does not equal the increase in wealth. What makes us rich is commodities, and the scarcity of resources such as land, labor, and capital limits the abundance of commodities.Doubling the money won't make those resources pop up, and maybe we'll feel richer for a while, but obviously all we're doing is diluting the money supply.As the masses rush to spend their newfound wealth, the price of goods also doubles, or at least rises to balance supply and demand, and there is no situation where you can hold money but can't buy goods.

Obviously we know that when the money supply increases, it makes its price fall, and such a change does not benefit society like other commodities, and the general public does not get richer for it.New consumption or capital can raise living standards, but new money only makes things more expensive, in other words, our purchasing power is diluted.

In fact, the essence of understanding the problem is that money is only used for its exchange value, and other goods have various "substantial" uses: an increase in the supply of goods can satisfy the desires of more consumers, but money can only be used for the future Its use is in the exchange of value or "purchasing power".

We must know that the harm of inflation is not as simple as rising prices. Inflation is the enemy of our individual investors. Although daily or volatile stock price changes are thrilling and worry investors the most, they are not the biggest worry for individual investors.The erosive power of inflation is really scary. At 5% inflation, the purchasing power of your banknotes will be halved in less than 15 years, and will be halved again in the next 5 years. .If inflation is 7%, after 21 years, that is, "early" retirement from the age of 61 to the age of 82, the purchasing power of your banknotes will drop to only 1/4 of the current level.Today, however, 82 is an increasingly common life expectancy.This is obviously a serious problem, especially if the individual has retired and has no way to increase capital to offset the terrible erosion of purchasing power by inflation.

The inflation-stimulated economy story is like God's trick to make jobs look more attractive and lure people into taking them.This is like a race that the whole people participates in. On the surface, it creates economic prosperity, but in fact it damages the lives of the majority of the people.If people knew more about the economic situation, people would not accept it.Milton Friedman famously said: “The first few months and years of inflation are like the first few sips of wine. Everyone has enough money to spend. Prices go up Not keeping up with the increase in money. It’s only when prices catch up that the hangovers start to show.”

Robert Shiller, an economist at Yale University in the United States, once conducted a survey on inflation.The results show that: 77% of the people believe that inflation will make them poorer, while only 12% of economists agree with this view.When asked, would you be more satisfied if wages and prices rose at the same rate?As a result, 49% of the public think it is possible, but only 8% of economists agree with this.

Inflation has never been good for society, it has only benefited one group at the expense of another.Inflation is the fraudulent appropriation of another's property.In a free market, price is the core of a market economy and the most important means of resource allocation.Inflation will disrupt the normal signal reflected by the market price to the economy. Once this signal is distorted, the behavior of many companies and individuals will appear obviously irrational, leading to chaos in the economy and even economic crisis.Just as Richard W. Fisher, president of the Dallas Fed, said: "Inflation is a very terrible force. No matter how attractive it looks, it will eventually end in disaster."

Review of the Century: Inflation in my country
According to the data released by the U.S. Department of Commerce, the U.S. CPI rose by 2007% in October 10, and the Eurozone CPI rose by 3.5% in October, an increase of 10 percentage points from the previous month, exceeding the European Central Bank’s expected target of 2.6% for two consecutive months .In emerging market economies and regions, prices rose rapidly, with CPI exceeding 0.5% in Russia, South Africa, Argentina, and Vietnam.

According to statistics from the International Monetary Fund and the World Bank: In 2006, global food prices rose by 9.8% over the previous year, of which, food prices in low- and middle-income countries rose by 9.7%. In the first quarter of 2007, global food prices rose by 11.6% year-on-year, of which, low- and middle-income countries rose by 8.7%.It should be said that global inflationary pressures are increasing.

Inflation is a worldwide problem, it has happened or is happening in many countries.So, has there been inflation in our country before?How did these inflations happen?

At present, my country's prices continue to rise, and various price indexes such as consumer price index and producer price index remain high. Inflation has begun to show signs of inflation, and the society's attention to inflation is also increasing.Inflation is actually not a new thing for the common people in our country. We have experienced it several times from the 20s to now.

The first inflation occurred in 1980.Since 1980, my country has implemented the policy of reform and opening up, and the economy has begun to grow rapidly. At the same time as the economy has grown, our country has also experienced the first inflation after the reform and opening up.In terms of macroeconomic operation, the main manifestations are the rapid economic growth, the surge in investment scale, the increase in fiscal expenditures resulting in a relatively serious fiscal deficit, and the blind expansion of imports that led to my country's foreign exchange reserves quickly approaching zero and a serious foreign trade deficit.

In terms of broad money supply (M2), in 1980, 1979 billion yuan of money was added compared with 384.8, while the average annual money increase from 1970 to 1979 was only more than 90 billion yuan.In terms of price index, prices rose significantly in 1979 and 1980. In 1980, inflation reached 7.5%. Among them, the producer price index of agricultural products rose by 7.1% year-on-year, which accounted for a large proportion of the increase in CPI.But it is worth noting that the producer price index PPI did not rise simultaneously with the CPI in this inflation.

In response to this inflation, my country has mainly adopted strict macro-control methods: such as compressing capital construction investment, shrinking money and controlling prices.As a result, inflation started to germinate in 1979 and was basically contained by 1981, which took more than two years.

The second inflation occurred in 1984.This is a period of rapid economic development in China. The reason for inflation is that the excessive scale of fixed asset investment leads to excessive social demand, and the growth of wage income exceeds the increase in labor productivity, which leads to rising costs and pushes costs.We can see it from the broad money supply (M2) and price index. From 1981 to 1983, an average of more than 400 billion yuan of currency was added each year.The growth rate of money was 22%. In 1984, compared with 1983, the new currency was as high as 1071.3 billion yuan. In terms of price index, in 1985, the producer price index PPI rose by 8.7% year-on-year, and the consumer price index CPI rose by 9.3% year-on-year. The producer price index rose by 8.6% year-on-year.It took three years for the inflation to be eliminated under the country's macro-control.

The third inflation occurred in 1988.Perhaps many people still have fresh memories of the panic buying in 1988, which can be regarded as a rare scene in the history of New China: from department stores to street grocery stores, they were all crowded with frenzied buyers.They rush to buy everything, jewelry, TV sets, even soap and Chinese cabbage, regardless of whether they are needed or not, and no matter how much they can use at a time, after buying it, some people rush to buy soap that has not been used after several years over. The CPI has created the highest record since the founding of New China nearly 40 years ago, with a year-on-year increase of 18.8%.Behind such a high CPI, the producer price index of agricultural products has risen by 23% year-on-year, and the producer price index PPI has also risen by 15% year-on-year.In terms of broad money supply (M2), from 1984 to 1989, an average of more than 1500 billion yuan of new money was added each year, and by 1989 the money stock had reached 11949.6 billion yuan. It should be said that the large-scale increase in money supply was formed important factor in inflation.

This inflation lasted for three years from 1987 to 1989, and achieved remarkable results in governance. By 3, the price level generally fell.

The fourth inflation occurred in 1993. The Chinese economy in 1993 and 1994 was like taking stimulants. The development zones were smoking, stocks were skyrocketing, futures were being hyped, funds were surging, and bubbles were emerging.Many people can't resist the temptation to get rich quickly, and "going into the sea" to do business has become a fad.The currency in circulation in the society has increased, and the prices of goods have also risen. Even the prices of rice, white noodles, vegetables, meat, eggs, and milk are also rising.Daily expenses have increased a lot, but wages have not increased much. People feel that banknotes are worthless again, and many people are panic buying and hoarding valuable things again. During the three years from 1993 to 1994, the producer price index PPI, consumer price index CPI, and agricultural product production price index rose by 3%, 19.5%, and 18.6% respectively year-on-year. The rise in these indicators was particularly severe.The main feature of this inflation is the cost-shock inflation caused by the rise of basic prices represented by agricultural products.

So how did inflation cool down this time?First of all, the monetary policy has generally signaled moderate tightening, and the "prescriptions" prescribed are roughly as follows: First, control the base money supply. After the unification of the exchange rate in 1994, buying foreign exchange became the main channel for the People's Bank of China to release base money. To achieve a stable supply of base currency.The second is to strengthen credit control.The policy business and commercial business of commercial banks began to "separate". The People's Bank of China has strengthened the monitoring of fixed asset investment loans, and at the same time rectified the financial order, stopped illegal lending of funds, and purged financial institutions.The flow of funds is effectively constrained, as if drawing from the bottom of the pot, and fixed asset investment naturally cools down rapidly.The third is to increase deposit and loan interest rates to protect the interests of depositors and encourage savings.

From 1993 to 1996, various policies gradually took effect, the inflation rate dropped successfully, the economic growth rate fell back to an appropriate level, and the national economy avoided the ups and downs. landing".

Today, the rising prices we encounter are facing some new situations that are different from those in the past.For example, the current price rise in my country is characterized by the simultaneous rise of the consumer price index, real estate prices, and financial asset prices. Therefore, it is not feasible to only use a single monetary policy to curb the current price rise.Not only that, this price increase is facing a more complicated external economic environment than the previous four inflations.First of all, since June 4, the Federal Reserve raised the benchmark interest rate 2004 times in a row, leading to the emergence of the subprime mortgage crisis in 6. The transfer of the crisis to commodity prices led to rising global prices. At the same time, the increase in interest rates caused severe liquidity in the United States. Insufficient; Since then, the Federal Reserve has continuously cut interest rates, making the space for my country to raise interest rates to curb price rises smaller and smaller.Secondly, the general rise in the prices of agricultural products such as grain and oil in the international market has increased the pressure on my country's prices to rise.Finally, international crude oil prices continue to run at a high level, which has promoted a sharp rise in raw material prices. Once domestic refined oil prices are affected by a substantial increase, this "industrial food" price increase will drive a large number of industrial consumer goods. The price increase driven by the production cost.

If there is no other policy to offset the impact of the drastic monetary policy on the economy, the expected effect will not be obtained. We should adopt a strategy of combining various policies to effectively control inflation and smooth out fluctuations in the economic cycle.

where does inflation come from
1921年1月德国每份报纸的价格为0.3马克，随后上升为1922年5月的1马克、1922年10月的8马克、1923年2月的100马克直到1923年9月的1000马克。在1923年秋季，价格实际上飞起来了：一份报纸价格10月1日2000马克、10月15日12万马克、10月29日是100万马克、11月9日500万马克直到11月17日7000万马克。

There are also some stories about Germany under inflation:

A thief went to someone's house to steal something, and saw a basket full of money, he poured out the money, and only took the basket away; some children on the streets of Germany were playing a game of building blocks with large bundles of banknote marks ; a woman was carrying a cart full of marks in a trolley, a thief took advantage of her inattention, overturned the cart of banknotes, pushed the trolley and ran away; a housewife was cooking, she would rather not buy Instead of coal, burn paper money that can be used to buy coal.

These poignantly exaggerated little stories are the true portrayal of inflation. Severe inflation will damage our happiness and hope. So where does inflation come from?
Everyone knows that inflation is a big problem that erodes wealth. The continuous and comprehensive rise in the general price level is the so-called inflation.As a monetary phenomenon, one of the well-known causes of it is that too much money is printed, so that the growth rate of the money supply is much higher than the growth rate of the economy's overall output, and more money is produced. Chase and bid for fewer items in the supply and demand of the market.

(End of this chapter)