Thanks for putting this article together. It is now April 2011… we are on the cusp of seeing inflation skyrocket and the “velocity of money” (rate at which money changes hands as folks try to get rid of something worthless (cash) for something of value (essentials)) accelerate at an out of control rate. (To understand “velocity” of money… think about the childhood game of “hot potato”… nobody wants to be stuck with the potato so they try to get rid of it as quickly as possible).

Investing now is something I would like to do but not sure if I have the funds or knowledge to do so.

Why?

First, let’s try to define “the money supply.

Money Supply = Printed Currency + Credit

While its true that the Fed is printing currency at an unprecedented rate, this cant (by itself) lead to inflation. Its only part of the equation. Credit is the other part, and its being destroyed at a much faster rate than printed currency is being creating.

As people save up and pay off their debts, as they default on their debts, and as financial institutions lower credit limits and raise lending standards, the credit side of the money supply equation contracts. The credit side of the equation absolutely dwarfs printed currency, so the effect is much more pronounced.

Meanwhile, the Fed can loan all the 0% percent money it wants to banks, but this wont increase the money supply until those banks are willing and able to lend that money to consumers who are willing and able to take on more debt. Those who are still credit worthy are either paying down debt and not taking on more or they have no reason to take on debt in the current economic environment.

So the idea that 0% money from the Fed will lead to inflation is wrong. As you state, the real interest rate is actually positive since we’re in a deflationary period. So while the nominal interest rate might be zero, the real interest rate is not, meaning there’s still a price associated with borrowing.

Deflation is in the cards for at least the next couple of years.

If you really believe inflation or hyperinflation are just around the corner, then the best advice is to buy foreclosures and other distressed properties. Rent them out until the real estate market turns around. Inflation will drive up housing prices, and inflation will drive up people’s salaries making their currently unaffordable mortgage payments much more affordable. Under an inflation scenario we can expect a quick turnaround in housing and the economy.

Only one problem ¦ 500,000 job losses per month. How’s that bode well for a housing rebound and demands by workers for higher pay?

While I agree it’s a good idea to save money and to buy in bulk, I’d be looking for more deflation not inflation (at least not for a few years).

That said, if your car is worth less dollars, remember — your dollars can buy more. The overall impact to someone who has a job is actually good. But again, that’s analyzing an economic issue through the lens of a single individual who still has a job — many variables are being presupposed. Economics, of course, get messy.

Inflation is just where our currency shifts around a bit. The wealth is static, but the numbers change. Making the right moves now can mean we gain quite a bit.