The governments have spent worldwide almost 10 trillion Dollars in order to bailout their banks and to stimulate the economies. The bulk of that money has been spent by the US governments. The Fed and other issuing banks need to print money in order to provide for their stimulating programs.

What will come: inflation or deflation?

Economic observers are divided in the outcome of the joint efforts of all the governments. If all the efforts do not show a soon effect, there could be a risk of deflation. This is the really high risk scenario, because there is almost no space for the Fed and others to lower the interest rates again. They already tend towards zero and below zero means deflation with all the hindering effects to the economy. Such a scenario could slow down the economies during five to ten years. Consumers, people who live on pensions or social assistance benefit from deflation, because they get more for their money. Owners of corporate and government bonds also stand in a favourable position during a deflation. The economy, however, stagnates and there will not be enough jobs.

The other scenario could be an inflation that follows the actual period of deflationary tendencies. The gigantic amount of freshly printed money should have an effect as well as the global efforts to curb the economies.

Some benevolent effects of the inflation

A moderate inflation of less than five percent will have some benevolent effects. The governments are deep in debts after all the stimulating packages for the economies. Inflation devaluates the debts and relieves the governments. Individual debtors also benefit form the devaluation of their debts.

The moderate inflation stimulates consumption and thus the economies. Companies are encouraged to invest in new machinery and equipment. More jobs will be created. Inflation is helpful for the job-seekers and the enterprises. The unions, however, need to be alert in order to demand higher wages on time. Inflation eats the salaries if they cannot pick up. High inflation, however, is dangerous. It is as bad as if a patient takes too much of prescribed drugs. It has a contradictory effect. The patient gets sicker than before. High inflation devaluates the assets, the salaries and it weakens the pension funds and retirement schemes. People consume less if the wages and incomes on pensions do not keep pace with the prices.

Currency devaluation as an alternative option to inflation

The Fed or other issuing banks could achieve the same effect with a devaluation of the currency as with inflation. The US economy is strong enough to push through such a scenario. A devaluation of the US Dollar would promote the US exporters and favour the domestic industry in relation to the importers. The imported goods get more expensive in a currency devaluation scenario than the domestic produces. Thus a country can improve by currency devaluation its competitive situation on expense of other countries.

Investment in gold is the best protection against an inflation scenario. It even opens an opportunity to make money with investments in gold. Gold keeps its value as a kind of parallel money during inflation. An expected inflation might explain the recent increase of the gold price. More issues about how to make money can be read at Make Money Tip.

Liliane Waldner