So, if inflation is generally thought to be a "bad thing" won't deflation automatically be a "good thing"?

Sadly, no.

In it's own sweet way, deflation can be as damaging (some would say more so) as inflation.

And the best way to illustrate that is to take the example of Japan over the last 15 years or so.

Up until the late 80's Japan was the very model of a modern economic miracle.

Until somebody or something pulled the plug.

Since then Japan has been "enjoying" a prolonged period of "deflation" with...

• Millions of jobs were lost (and remember, Japan was famed for it's culture of jobs for life with major corporations boasting that they had never ever laid of workers - until now).
• The real estate market collapsed with residential and commercial values being decimated.
• People who had invested heavily in property during the boom years lost everything
• Interest rates falling into negative figures (-1% for example) - meaning that banks were effectively "paying" people to borrow money.

  Trouble is, nobody wanted to borrow any money because it was just too risky.

Complicated?

You bet it is.

In summary, too much inflation is a bad thing and a little bit of inflation is a good thing (unless you're a saver).

And any kind of deflation is a very bad thing as Dr Greenspan (chairman of the US Federal Reserve) will tell you.

It was out of fear of deflation that the US lowered interest rates to their current level of 1% (a 41 year low!), and there they've stayed for the moment.

However (don't you just hate those "howevers"), low interest rates have since fuelled a boom in consumer credit and re-mortgaging of housing which has led to an increase in house price inflation (which doesn't figure on the inflation figures) which has led to...

Well, who knows?

The one thing we do know is that instead of saving, people are now spending more and doing the reverse of saving, which is...

Taking on more debt

US consumer debt has reached truly staggering levels after more than doubling over the past 10 years.

The most recent figures from the Federal Reserve Board suggest that consumer debt hit $1.98 trillion in October 2003, up from $1.5 trillion three years ago.

This figure, representing credit card and car loan debt, but excluding mortgages, translates into approximately $18,700 per US household.

To put a damper on that overzealous spending, the US will probably have to raise interest rates sometime soo.

The UK and Australia have already started so to do, in fact as I write this page the Bank of England has today raised it's rate by a quarter of a point.

But raising interest rates will fuel inflation which will...

But 2004 is an election year in the US so - well, draw your own conclusions.

The thing is, everything needs to be in balance and when it is thrown out of balance - strange things happen.

The graph below shows the percentage of disposable income that Americans are now saving, and you can see the steady decline until it is now less than 2%.

 

The bottom line is...

If you're a saver - low inflation is bad for you.

If you're a borrower - low inflation is good for you.

At some point, inflation will change and the opposite of the above will be true.

How do I know?

Let me illustrate...

In 1974 if you bought a basket of goods for $1.00

In 2004 that same basket would cost $3.80

A rate of inflation in just 1 generation of 280%

How do I know?

Because like many people I'm fascinated by figures and "what ifs", and fortunately the internet is a barrel load of fun.

I found this wonderful link to the Federal Reserve Bank of Minneapolis, which had an "Inflation Calculator".

Try it out and have some fun, See how much things would cost now in comparison to your birth date or whenever...

Federal Reserve Bank Inflation Calculator

What Can You Do If You're A Saver?

Do (almost) exactly as you have been doing...

• Everybody needs some money in the bank "for a rainy day".

  So make sure you have some money available with "instant access".

  It's really no use to you if you can't get hold of it for 90 days or longer - that half a percent extra may prove to be very expensive in the long term.

• Don't put all your eggs in one basket.

  A cliche I know, but it's as true today as it's ever been

• Take some advice from a number of professionals, not just one.

  They may be advising you according to the highest rate of commission they receive.

  Yes, it's strange but true, but it has been known!

• You probably work hard for your money, so consider how best your money can work hard for you!

  Is it really working hard and getting the best return on deposit in the bank?

  And what about that mutual fund - is that outperforming or underperforming the stock market (more on this shortly).

• Obvious I know, but keep reading this website and follow all the links.

  If you decide we can't help you, you'll at least have started to think of things which might put you on the right track.

And whilst I'm on the subject of making your money work hard for you...

Whilst I've been sitting here composing and typing this page on savings, if you'd been one of our "happy band", working at just an average level, you would have made $1115.

That's right - $1115 in the last hour.

 

And just working at the most basic beginners level you would have made $230 in the last hour.

And I'm sure you'll agree, earning in excess of $230 an hour for doing almost nothing isn't too bad.

But that, as we say, is for the future.

And to find out what your Work At Home Business future could be - just click on the link or you could take a few moments to check out 7 popular ideas for a home based business by following the link to the TriggerSystem web site