“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily,” John Maynard Keynes, “The economic consequences of the peace” Inflation tax is an implicit tax on nominal assets, such as cash, bonds and …
Reader’s Question: Why Does Inflation Make it Easier for Governments to pay back the debt? The big fall in national debt as % of GDP occurred during relatively high inflation periods of 50s, 60s, and 70s. The 1920s and 30s were a period of deflation and high debt. There are a few reasons inflation …
Readers’s question: What is the difference between depreciation and inflation? Depreciation refers to a fall in the value of an asset. A depreciation of the exchange rate means a currency becomes worth less than others. For example, the Pound sterling falls in value against the dollar/euro/Yen. This graphs shows that the value of the Pound …
A summary for understanding exchange rates. Factors that affect exchange rates and the impact of exchange rates on the economy. Terminology Depreciation/devaluation – fall in value of exchange rate – exchange rate becomes weaker (see also: definition of devaluation and depreciation) Appreciation – increase in the value of exchange rate – exchange rate becomes stronger. …
The effective exchange rate measures the value of a currency against a basket of other currencies. This exchange rate index is usually trade-weighted to take into account the relative importance of other currencies. When looking at the effective Sterling exchange rate we compare the value of Sterling against our main trading partners – The Euro, …
Periods of high oil prices frequently lead to periods of recession shortly after. There are two main reasons for this. Higher oil prices reduce disposable income leading to lower spending. Higher oil prices push up inflation causing Central Banks to increase interest rates. Oil prices and recession With oil prices rising above $100 because of …
Summary – Periods of high inflation usually lead to lower returns on the stock market because higher inflation is likely to lead to higher interest rates, lower economic growth and lower dividends. Impact of high inflation on share prices If the inflation rate increases, this will make investors wary for a few reasons. Firstly, if …
Inflation measures how much the price of goods and services have increased over a period of time; and will have a significant impact on changes in the cost of living. An inflation rate of 5% means that on average the typical household basket of goods (e.g. food, TVs) and services (haircut, restaurant meal) is 5% …