Inflation – another worry

It appears inflation is something else about which to worry.  Two news items: one reporting a doubling of the money supply in three years and the other reporting an increase in the British inflation rate.

With an increase in the money supply and no corresponding increase in the quantity of goods and services being produced something will have to give –  either the velocity, the rate at which money moves through the economy, will have to go down or prices will have to go up.  There have been some indications banks are holding cash and not making loans and therefore the velocity has probably gone down.  It will not be surprising to also see some inflation happening – maybe a lot.  Inflation is one of the ways in which people can lose their savings.

The mitigating factor is that financial institutions are likely suffer some extensive losses over the European debt crisis.  Because banks are the key factor in creation of the money supply this will work to reduce the money supply.

Money supply is a difficult thing to evaluate as there are number of definitions and velocity is impossible to measure.

I’m wondering if my wife and I should go on a shopping spree and max out our Visa card.

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