6) Inflation Makes Your New Debts Grow. Most lenders aren't stupid (well, at least not that stupid), so they don't want to lend you money today that will be worth less (in terms of buying power) by the time you pay it back tomorrow. So they charge interest on money they lend, in the hope that what you pay them ends up being worth more in buying power than what they originally lent you. And if inflation kicks in, the only way for lenders to come out ahead is to start charging higher interest rates. Higher than the expected rate of inflation. So if inflation is high, you can be sure new loans will cost you more too, in the form of even higher interest rates.

7) Inflation Makes Governments Crazy. When prices start to rise, people get angry and confused. When people get angry and confused, politicians feel the need to "do something." When the problem is inflation, the "something" politicians typically do is make a law against rising prices. It sounds ridiculous, but this is what they do. President Nixon tried it in the 1970's (his so-called wage-price-freeze) and other governments around the world have tried it too. It never works. It's like slamming a lid on a pot of boiling water, but leaving the heat turned up. The pressure builds under the lid and eventually it explodes off, and the water keeps boiling. I have no good advice on how to cope with inflation-inspired government craziness, other than don't be surprised when it happens. Politicians have a hard time grasping that laws of economics are infinitely more powerful than laws of government. Just know that the stronger your financial foundation is today, the more prepared you will be to deal with whatever comes tomorrow.

November 30, 2009

Stephen L. Bloom, J.D., teaches economics and personal finance at Messiah College. He is a consultant at the United Methodist Stewardship Foundation of Central Pennsylvania and an estate planning and transactional attorney at the Pennsylvania law firm of Irwin & McKnight, P.C.  A frequent media guest and speaker, he is author of The Believer's Guide to Legal Issues (2008, Living Ink Books).