Sound As A Dollar

Inflation happens when more money chases the same or fewer goods. For the past three years governments have injected a great deal of money into the economy. The goods and service side has not changed as much, yet there has been no significant inflation. How come?

There are several possibilities for the no inflation result. Perhaps the best guess is that it is a combination of many things. The candidates:

  1. People are not using money to chase goods. They are using it to pay down debt.
  2. Many people have lost their jobs and thus have less spending power.
  3. Banks and many businesses are holding much larger than normal cash reserves. Banks are not relending the money that the people used to pay off their debts.
  4. Holding cash reduces the “velocity.” When dollars are used for purchases they turn over quickly. A dollar that changes hands four times a year is different than a dollar that changes hands twice a year. A reduction of velocity reduces inflation.
  5. Foreign governments have increased their dollar reserves.
  6. This time is different. Printing money really won’t matter.

If you want to bet on 6) I would like to hear from you.

Inflation will eventually appear. The result will be higher interest rates and reduced value of dollar denominated assets. That result is baked into the economy.

If your doctor tells you that you are as sound as a dollar, call 911.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

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