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|| DON'T WASTE - JUST INVEST ||

|| FOR CHILDREN OF APPROPRIATE AGE ||

|| INFLATION ||

Dear Friends:

If somebody asks you what is the most sensitive thing in the body you might tempted to say that it is the cornea of the eye ball or it is the heart.

But if somebody asks you what is the most sensitive thing in the market world, it is the stock market index.

Just to say that even if somebody sneezes it can go up or down.

Stock market depends upon the economy and economy depends upon the inflation.

Inflation depends upon the flow of money in the market.

Do you know money is like a balloon? It can inflate and deflate. When it inflates its size swells. It looks bigger. Though, its value remains the same, it’s buying power decreases.

Let’s say, for example, different balloons have different colors and different dollar bills are printed over them. For example, one balloon is of green color and a 10 dollar bill or 10 pound bill or one currency bill of any country is printed over it.

When it is inflated its size increases, at the same time the print over the balloon also gets bigger and its volume increases but its value remains the same – 10 units of the currency.

Meaning it is still, for example, 10 dollar bill but when you go to buy a thing, which used to be worth 10 dollars before, you wouldn't get it. Now you need more of such 10 dollar bills or balloons to buy the same thing.

This is called inflation.

Inflation means the real value or the buying power of the money decreases.

You must have heard people saying that few years before, let’s say 20 years back, cars were selling for 1000 dollars. Now the same cars are selling for 20,000 dollars. You might think that if it was that cheap at that time, than why the people at that time did not buy more cars? The people did not have that much money at that time.

So what happened now? People got more money now. Why? Because of inflation.

1000 dollar swelled to 20,000. Let’s say they reproduce themselves over the period.

What happened here?

Federal Reserve Bank or any country’s top government reserve banks hold money against some fund in gold. Time to time they release this money in public, to banks, buy lending them money on interest. When they fear of inflation, they tighten their valves by raising their interest rate. So that money would not pour in the market. If they fear of recession, they loosen their valve to pour more money in the market by reducing their interest rate so that borrowers can borrow money easily.

Over the years, money in the market increases by so many factors, like more and more people working making more money. So that people have more money in their pockets to spend. When more and more buyers are there in the market, the demand increases. When the demand increases the supply relatively decreases, if you can not cope up with the demand in time. If you have more buyers and less supply it increases the competition among the buyers and the prices go high. Now, to increase the supply, production should go high, and for the production to go high you need more and more money up front. Companies look for the money. They go to the banks to borrow more money. Banks go to government to borrow money. Ultimately more money is poured in the market. Now to increase the production you need more job openings. More jobs open, more money is poured in the market. People have more money in their pockets. People spend more money. Prices go high. And the cycle goes on. We say economy is improved. Thus, the inflation cycle goes on and on.

That’s how 1000 dollar cars many years before sell for 20,000 dollars now.

When it becomes critical, the government tightens its valves by raising its interest rates for lending money to control the inflation.

That’s how the inflation is controlled.

Sometimes, something happens in the world which creates uncertainty and suddenly people become cautious. Some kind of fear generates and they stop spending, demand decreases, supply decreases to keep up the affordable prices, production and sales decreases, jobs decreases, money in the market decreases, balloon deflates, and economy worsens. At that time government tries to improve economy by decreasing their lending interest rate, in such a way that it boosts the economy at the same time it does not create the inflation.

Inflation eats away your money.

If you put your money in the bank for few years and the bank pays you the interest, it looks like your money grows in numbers but if the interest rate is less than the inflation rate, in fact, the value or buying power of your money goes down. So even if you have more money at the end, its worth is less.

So today's lesson is:

"Beware of the Inflation".

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