How does inflation affect personal wealth?
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As a general rule, if you hold cash, inflation makes it worth less over time, if you hold assets or things that don’t depreciate, generally inflation makes them gradually increase in value over time.
It depends on how you’re currently holding your personal wealth.
If it’s sitting in a low-interest bank account, inflation devalues your cash. That’s because the money in your account is devalued every day that the currency inflates.
If it’s in something like stocks or bonds, your wealth might increase, stay the same, or decrease. If the stock market increases in value faster than inflation, your wealth will increase. If it increases at the same rate as inflation, you’ll break even. If it increases slower, you’ll lose money relative to inflation.
If you are referring to the personal wealth included in the open data for the fed, ecb, and bank of england – personal wealth is the same as net assets on a balance sheet, which is the same as equity + liabilities. If a liability increases, then personal wealth also increases so taking out a loan increases your personal wealth. This may sound backwards, but all liabilities provide some sort of asset in the case of credit – this is cash (and not it sounds more digestible). Inflation will increase credit consumption, which increases net worth. However, once inflation starts to choke revenue flows, losses are incurred which affects retained earnings (part of equity on a balance sheet), and thus reduces personal wealth. In short, inflation will increase personal wealth. If inflation is high enough to cause a recession, then personal wealth will follow with the disinflation/deflation during a recession and decrease. Mostly because of losses absorbed by retained earnings.
It depends on how that wealth is invested… if its in cash, you lose wealth/buying power as those dollars can buy less. If it’s invested in assets like stocks or real estate, the value of those assets tends to increase at rates higher than inflation.
Imagine you’ve got $100 dollars in the bank and coffee is $5. So you’ve got 20 cups of coffee in your account. Then inflation kicks in and coffee is now $10 a cup. You still have $100 but now it’s only worth 10 cups of coffee.
Inflation just means that a given sum of money has less purchasing power, so it depends if the cash components on your balance sheet are assets (you have stuff) or liabilities (you owe money to someone).
So in general inflation helps people who own some form of capital but owe money, but hurts the people who lent them the money (if we’re only talking about wealth, obviously inflation can hurt wage earners whose wages are worth less now).
In US history you’ll here about the “Free Silver” movement that wanted to debase US currency because farmers owned capital (they could grow crops and sell them at whatever price level), but owed a ton of money to banks.
In the current economy there’s one other interesting twist: If inflation is high you prefer money now to money later (which will be worth less) with the result that high speculative stocks are much less attractive.
If you have accrued dollars that sit in the bank, in your own piggy bank, or similar purely dollar-denominated assets, the government takes some of the value from those, and gives it to banks in order for them to leverage it many times over through fractional reserve banking and give out loans to other people, in turn providing government with credit to do stuff with, like send checks to people in the mail, build bombs to drop on weddings and hospitals, and give you parking tickets or tell you your garage is 6″ too close to the property line.
No, I don’t have any opinions about that.
And to be fair, many people hold wealth in assets which hold some other sort of value. Commonly those are stocks, which will go up in price following inflation but with a certain time lag, and which are taxed at 15% or 20% when you sell them; and real estate, which is taxed continuously as you own it, or else you will be run off of that real estate, and then also taxed when you sell it. It, too, will increase in value with inflation, but also with a time lag like with stocks.
In Apple Tree school, all of the students received a single chocolate bar every Friday for not missing school for that week. A few kids would miss getting the bar every week, while a few other kids would get an extra chocolate bar or two from their parents every week.
Everyone loves chocolate bars, so the kids would trade bars for almost anything else. From really cool erasers to Pokemon cards. The more bars one had, the more trades they could do.
All is good until one day, Jessica’s parents go to buy a couple of boxes full of chocolate bars. Those parents let Jessica have as many bars as she wants.
After she begins to bring many bars to school, all the children realize there are more chocolate bars to go around. So now the children want more chocolate bars every time they trade something cool.
Which is a problem for most children because no one wants to trade for one or two bars anymore. Now children have to wait longer to trade because the chocolate bars they have saved up are no longer enough to trade with. Doesn’t matter if they never missed school or always traded their bars wisely.
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