The Two Banana Economy: Economic Growth, Inflation and Productivity
At every Fed meeting, whether Bernanke raises interest rate or not depends on whether he thinks there is Inflation. Understanding Bernanke means understanding clearly the concepts of Inflation, Economic Growth and Productivity. And so What’s Hot for this week features a short lesson on Inflation, Economic Growth and Productivity. Inflation happens in an Economy when Price growth outstrips Output growth, resulting in spiraling prices [including spiraling wages, the price of Labor], and loss of incentive to work and save as costs living became unmanageable. Extreme cases of inflation [such as sometimes happens in third world countries like Zimbabwe or Indonesia] will mean you have to carry a wheelbarrow full of notes to Wal-Mart. And you would not want to keep money in the bank or under the bed when you know $1 will be worth less than $1 tomorrow. One way Inflation can happen is when the rate of Productivity growth is less than the rate of Economic Growth. Simplified Example: There is a ...