How to (Truly) Stop Inflation in the Economy

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Have you heard? Inflation is quite the talking point not only in the media, but I’m guessing within your personal finances. I was not alive in the 1970’s when inflation wreaked havoc on the economy, but here we are once again! From what I have seen, there are a variety of opinions on the causes of inflation in today’s economy and when it will subside and go away. While I certainly respect the opinions of all, at times I have to wonder if any of these people have ever taken a basic economics class. At times, as scary as it is, I also wonder the same thing about the federal reserve! There are laws in science and there are laws in economics. You can let your emotions dictate how you “feel” about these laws, but at the end of the day, these laws don’t care about your opinion. They are what they are. With that in mind, I want to discuss how to truly stop inflation in the economy. I understand some people might disagree because of the “feelings” it brings about; however, as mentioned, that does not take away from the truth of the matter. If someone is not suggesting these kinds of changes, that would be a huge hint that the person either does not understand basic economics or they’re not ‘actually’ that concerned about controlling inflation and putting an end to it. It all starts with forcing people to change their behaviors, here’s how...

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The problem is that for most people the "something" is basic items like food, groceries etc. I can't wait to buy these things. Big cooperation realized that and just raise prices higher and higher. This leads to more inflation, which makes the big cooperation raise prices again, in an everlasting vicious cycle. We can't stop that with raising interest rates, because people need to buy these items.

Cookiemaster
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I agree on slowing down spending everything right away, although making Interest rate higher is also a dangerous game: it slows downs production, investments, costly on mortgages (housing is the main spending post). This is also a recepe used for previous but different inflation crisis. It doesn't solve many of the new factors that generate the current inflation:

-war in Ukraine.(making gas and oil more expensive, you need these in all steps of food production making food more expensive too, not just energy bill)
-climate change (loss of crops), -climate transition (cotsly investments), -retiring boomers( less workforces), -devaluation of money. Inflation means your money worth less, it's not the just the price that are more expensive, it's also your money that has less value. (since COVID Westen economies have spent a lot but produced less)
- relying on other countries for cheap good production (when they stop producing, the products get more expensive)
- adapting the salaries to inflation rate ( feeds it and continue the cycle).
-Growing world population. There is less ressource for more demand.

Playing with interest rates doesn't address all these problems and as long as we don't fix at least some of them the inflation will continue.

Deflation is also a dangerous game, just like with inflation when everyone spends right away, the opposite happens with deflation, people stop spending and wait for prices to get even cheaper, therefore companies make less profit, stop hiring or layoff people and it creates a recession.

Not everything but some things to address the current inflation:
- play carefully with interest rates, making sure to not stop investment or make mortgage unaffordable, rise for a while but should drop again at the right time.
- rise carefully salary for minimum wage and lower minum class so they can afford living and consuming, but ensure to not enter a cycle that will feed inflation.
- heavily tax the profit of compagnies that make extreme benefits over inflation (energy companies now) and reinvest that in energy transition to diminish the dependency on oil and gas in every aspect of our life. (Nuclear energy is the cheapest and more safe than what people think, electrify transport of food and farms, replace gaz based ferilizer
- ensure autonomy in food and industrial production. If you don't need to import it you are not dependant what happens elsewhere. (But not enough if you're depending on the energy to create these)
- robotisation to replace the loss of work force, instead of building cheap goods in Asia, these could be built locally at the same cost with robotisation. Better for the environment since less transportation needed and bring back taxes locally.
Immigrant, brings back new young workforce to replace retiring boomer.
- the world population will continue to grow but the richer poorer countries will get the less their population will grow.
- we will also have to live with climatic event that ruins crops more often so we need to finds ways to garentee food production despite these events.
- Switzerland is a great exemple of controling inflation to keep it low and making most of deflation. The central bank prints a lot of money but own 90% of its own currency to protect its value by stopping the circulation when inflation is at the doorstep. The central bank also has a massive stronghold of gold, bonds, other currencies and makes a lot of benefit.




Turkey with 80% inflation is a good exemple what happens if you refuse to adjust the Interest rates. However that alone would still not be enough.

It's a different world, different causes therefore different solutions needed.

Super-JD
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I know this video is from 2 years ago but this was absolutely perfect explanation and reading your responses to the comments has really educated me in this topic and changed my whole perspective. Thank you!

dagamon
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When there was a gold standard, inflation was so low that the little interest earned actually was a really profit and the vast majority of people did have a save and wait mentality, they would be like your great grandparents but spend today, pay tomorrow schemes from banks and high inflation changed all that in the 1980s .

Jagdtoq
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The problem is : " spend now, pay with future inflated money". This create too much borrowing that drive inflation further & further.

nagatang
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The problem is our government wants people spending and not saving. They want us continually buying things that we can’t afford on credit. Spending makes the economy thrive which is a very intentional design that will never change. Good concept though!

marshanco
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Savings will earn interest as long as that money is lent to other who in turn has to payback with more interest.
To me this is a problem of not having the right amount of money in the economy on the first place

DistributistHound
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Interest rates definitely do discourage non-essential spending, but this lack of spending can have ripple effects across the economy. It can cause a wave of businesses to collapse. Since many businesses operate using loans, it can trigger bank collapses as well. Additionally, interest rates have a profound effect on the secondary market for treasury bonds which can put more pressure on banks. We live in a world with very complex supply chains and complex financial inter-dependency. Raising interest rates constricts spending for both consumers and producers. If the operations of producers are constricted too much then it can lead to massive supply shortages which will more likely trigger hyperinflation. It is these many ripple effects of interest rates that make it aggressive to only raise rates by 0.5% per increase, which is why interest rates is only one tool used to control inflation.

A large part of this most recent round of inflation was caused by supply shortages which were triggered by the global lock downs in response to the pandemic. Just the lock downs alone are enough to trigger inflation since they dramatically reduced the supply of goods and services. Preventing people from working and then giving income-replacement payments only increased the money supply which is now competing for fewer goods and services. Increasing the supply of goods and services is another tool that can be used to control inflation. One negative impact of raising interest rates is that it becomes more expensive to create new supplies for goods and services which only contribute to inflation, especially for essential goods.

Prices going up is only piece of the issue. I prefer to view inflation in terms of the essential goods: food, clothing, shelter and transportation costs related specifically to gathering income or resources. According to one source: valuepenguin, the average household spent about 40% of their income just on food in the early 1900's. According to the same source it dropped to 30% by the 1950's and a mere 10% by 2013. Looking only at the dollar value cost of goods or services can be misleading. It's better to compare the cost of the essential goods to what percentage they take up in the average household budget. The demand on bear necessities is primarily influenced by population growth and interest rates don't necessarily stop population growth in the short-term so the demand for those types of products continue to rise while the production of those products are restricted during times of high interest rates. As usual, those with the lowest incomes would experience the worst effects.

If the average household income in the US is $74k and the average tax rate is 13% then the average net income is $64380. If the average annual household expense on food is $13k then that is about 20.1% of the household budget. The suggestion in the video is simply to save money, benefiting from high interest rates, but this method only works with discretionary spending. The primary issue for most people are the essential goods. This is the fundamental part of the economy that is made worse by raising interest rates long term and cannot be helped by simply saving money.

jasonbrasington
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I never thought I would get to watch a class in 4K cinematic. Great video

berkkarsi
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When the deman goes up, the price goes up. The supply could either go up or down based on the risky situation or stability. In order to Controling inflation we also need to take a look at the stability of the current situation and the behavior of the market before we make any decision of increasing or decreasing the interest rate.

leftafricalongtimego
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Interest rates are the same for everybody but not all items inflate the same. Take technology. New tech is always high because it's better, newer and in limited supply. As time progresses, prices fall fast. Consumables are volatile such as the price of eggs being low when hens are plentiful and healthy but high when a bird flu kills them by the thousands (typical supply and demand). I prefer a different solution that gets to the root of the problem of high prices in general and that is ENERGY POLICY. Think about it. All goods require energy when harvested/mined, transported to a facility to be processed/assembled, transported to wholesale markets, transported to retail markets, and warehousing costs. Then customers must use energy to get to the products and energy to consume them (refrigerator/freezer for food, heat for cooking, outlets for appliances, etc...). Imagine how fast the costs of goods would drop if all energy prices dropped by half! I did grow up in the 70's and saw first hand how the cost of oil caused the prices of everything to inflate. The inflation caused workers to strike which caused prices to rise THANKS VERY MUCH JIMMY CARTER! Now it would be easy to just say DRILL, DRILL, DRILL but...that may not be so good for the environment. That's why everyone needs to put on their big boy pants and go full throttle to clean, safe nuclear power. France did it! They're 70% nuclear and going more nuclear every year. We can do nuclear cleaner, safer and cheaper than we did in the past using safer more plentiful fuels like thorium and molten salt. We can build modular reactors instead of the big expensive facilities of the past. We can recycle spent nuclear fuel (until Jimmy Carter ended it via executive order and Ronald Reagan reinstated it but by then it was too late). We should also not forget about hydroelectric and geothermal wherever possible. Solar, wind, tidal and biomass can also contribute. We will never replace oil and gas because we need it for jet fuel, lubricant, asphalt, plastics and cosmetics but we don't need to lean as hard on it as we did in the past. My point is that by lowering the costs of energy, you can reduce the cost of goods so that even if inflation is high, the prices are not.

ericsperling
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Another educational video. Thank you Mr. Clay for all you do for us, for putting your time and effort and sharing your knowledge with us!! May your family be blessed for many years to come. Happy new year! And.... Let's Go Brandon!!!!

danielchenet
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It goes hand in hand with basic supply and demand principals as well. Demand goes up (everyone buying/spending), and price will rise (given that supply is not also going up). And if demand for that good goes down (people saving), the price will be forced to go down (also given that supply does not go down). So you could explain it that way as well.

passionfruiter
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We definitely need more economic lessons. Amazing video

loki-of-asgard
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So why dont we make a month out of a year to saving? Make it frowned upon to spend money and make people feel bad for spending their money? The application of that would be hard to do, but it would allow us to easily make inflation to stop

xendolawesome
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Actually, the only strategy for preventing prices from increasing is to increase supply and increase competition. Unfortunately, the price mechanism does not clear markets for assets with an inelastic supply. The policy solution is to impose an annual tax on the holder such an asset equal to the asset's potential annual rental value. If this is done, there is no actual or imputed income stream to be capitalized by market forces into higher and higher prices. Owners of such assets with an inelastic supply (e.g., land and other natural assets) will either bring the asset to its highest, best use or sell to someone who will. Thus, the high annual tax prompts an increase in supply, which prompts an increase in competition.

Recommended reading: University of California economics professor Mason Gaffney on taxation and macroeconomic theory.

nthperson
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What is the effect of inflation and interest being the same %? This sounds good as then spending and saving should be random and this currently sounds like a healthy economy to me. It also means that it will not be controlled and it will likely be net spending or saving still.

Watere
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Would a save mentality lead to a vicious cycle where the interest rates being higher than the inflation rate will eventually kill businesses?

How would a business deal with their expenditure (e.g materials, wages) but see their products not sell?

JuicyCharon
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In my opinion, fighting the inflation is one thing and fighting greedy is a different thing.
First, I don’t believe in any inflation number announced by the government, ( it does not match with real life inflation numbers).
While government is taking about 7% inflation, in reality we see 20-25% inflation.
Prices going up because we don’t fight greedy
Same product that is been sold at A for example, u will find it at B for 20% cheaper, but people still want to buy it from A because B is 1 mile down the road further.
By the end of the month u have realized that u have to reduce ur spending by 25% more to keep living with 5% inflation.
So by the end the inflation # announced by the government is way different from the # in real life
Still would love to discuss the inflation # with the government officials and find out how did they got that #

essamdalgamouni
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Great video! However, a common counter-point from economists against deflation is that it can stop the economic growth of a country because less people are able to consume because lower prices will lead to a lower demand. This leads to businesses earning less profit and being forced to lay-off employees or give lower wages which in turn leads to further lower demand and supply. I don't know if this is true though.

Jojo-lgjm