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Finance: What is Inflation and How Does It Work? 46 Views

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What is inflation and how does it work? Inflation is the gradual increase in prices over time. You might today pay 100x for the commodity coffee what you would have in 1905. Fortunately, you probably make 100x the salary you would have made then, too, so... it all works out. Now you can have your coffee and, uh... drink it, too.

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00:00
Finance allah shmoop shmoop what is inflation and how does
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it work This is inflation and this is inflation and
00:11
this is infiltration but really isn't relevant So get that
00:14
out of here okay The kind of inflation were referring
00:17
to is the kind where money gets more prolific so

00:21
that prices that have stayed steady well feel cheaper All
00:25
right now what the fuck does that mean Well when
00:27
economies are good and everyone is working getting paid able
00:32
to save money and buy themselves luxuries like ah waffle
00:36
maker that injects maple syrup directly into the waffle While
00:39
people tend to be willing to pay more to get
00:42
stuff they'll pay two hundred dollars a person for a
00:44
one day pass to disneyland They'll buy a second car
00:47
a flashy one that gets terrible mileage but will impress
00:52
the neighbors They'll buy this thing whatever it is because
00:55
it is heart Why not there's more money to go
00:57
around Products want to increase in price Ah home in
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eighteen eighty and central california might have cost a thousand
01:03
bucks that same home today Well it's been remodeled a
01:05
couple times but it might cost a quarter million dollars
01:08
Or more but annual wage or salary in eighteen eighty
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Might have been two hundred dollars So that house cost
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five years Wages gruel forward to today in an average
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wage is fifty grand And voila Well that home also
01:21
costs about five years Wages was their inflation Oh yeah
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Big time Was there really cost increase in the house
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will know you had to work the same amount in
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eighteen Eighty is he do today to buy the same
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house All right So why do people want inflation Like
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why did money have to go up so much When
01:39
five yearswork buys the same today as it did one
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hundred fifty years ago Psychology mohr is more which means
01:45
better So people simply like having a bigger number Over
01:49
time it comforts them to think that they're actually gaining
01:52
traction in the financial creek in which they are paddling
01:56
Perhaps more importantly governments want inflation Why Because they borrowed
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tons and tons and tons of money But most of
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the money the governments have borrowed is in fixed terms
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or steady interest rate numbers That is the government agrees
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to sell fifty billion dollars worth of debt at two
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And a half percent interest We exist in a given
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time period at a rate of two point five percent
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inflation calculated as the existing costs of a basket of
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stuff that people buy You know like milk paper towels
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a six pack of bundy's dog treats heartburn medication that
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waffle thing And so on Those and many other prices
02:30
air checked in dozens of stores averaged and totaled And
02:33
a gross number comes out each year In this case
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the total basket of goods assessing inflation last year might
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have been well let's say a hundred grand for simplicity's
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sake This year that same total is one hundred two
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thousand five hundred dollars that's How we got that two
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point five percent annual inflation rate Okay so now there's
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a shock to the system A bomb goes off in
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a mini war start The economy booms his government's by
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all kinds of us products In an effort to you
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know kill one another The bomb making factories pay a
03:01
lot of overtime Toe workers who spend more save more
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and inflation starts to happen all of a sudden that
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carton of milk which used to be three boxes now
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four bucks and everything else moves the same direction So
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we go from a steady hundred year average rate of
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about two and a half percent a year to now
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suddenly a seven percent inflationary environment and that last for
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five years before regressing to the mean of two and
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a half percent So we have five years come Found
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it at a four and a half percent increase in
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inflation It quote made money cheaper unquote As for that
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fifty billion bucks the government borrowed it still has to
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pay the two and a half percent of your interest
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on lee now it's relatively way cheaper to pay back
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that loan You can imagine the case that brazil had
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in desperately trying to pay back its loans many times
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in the asked by inflating its currency i eat making
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the federal borrowing rate from its treasury super cheap like
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one percent or less It made borrowing easy for businesses
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and individuals and in the process drove very high inflation
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rate it's almost twenty percent a year on average for
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a sustained period of time This means that the real
04:04
cost of debt drops by about fifty percent every three
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And a half years or so and that the people
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who loaned the brazilians money were very very p oed
04:14
might seem like inflation then it's just a dandy thing
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to have It makes loans cheaper It lets everyone pay
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off their bills quicker easier better The problem is that
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what happens next time A government wants to borrow money
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and they have a track record of letting inflation spiral
04:29
out of control Lenders just go away How deflating hey
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