What is the rate of inflation, and what will it be in the future?
The inflation today is easy to determine by looking at the money supply. It is about 10%. The problem is, that not all of that is issuance of permanent new dollars, but a big part of it is credit. The credit temporarily adds more dollars into the economy and drives up prices, such as stocks, real-estate, commodities, precious metals, your gardener’s daily wage, etc. But there is always a chance that credit goes away, e.g. if people default on their debt or if they had enough of speculation and rather want to pay it back to have a peaceful mind.
Both components of inflation are hard to predict and can vary in a wide range.
a) The credit component could vary from a huge negative number (in a credit collapse) to a moderately positive number (if speculators continue to borrow dollars to invest in assets).
The upper boundary will be somehow restrained by the ability of servicing the debt and by the margin requirements. We are at quite high levels of debt, and most people couldn’t afford to take on much more, since their monthly interest would eat up all their income. But if interest rates go down to 1% again or say to 0%, you could service an infinitely large debt. But you also have margin risk, e.g. if the asset you bought drops by the amount of money you put down. So you probably don’t want to take credit in the amount of 1000% of your assets, since if prices drop 10%, you are bankrupt. But some people do it anyways.
The lower boundary can be defended by the governments and banks to keep the party going. They will just prevent you from paying back your loan or defaulting on your house, simply by lowering interest rates again and convince you that you can ride it out.
b) The money component will always be positive as long as we are in a fiat money system, and as long as we have a government that likes to spend and citizens that are pleased with it. The government can so easily issue new dollars, e.g. by purchasing their own bonds, that the possibilties are unlimited. They can pay their salaries, their lobbying groups, the military, old, poor, and sick citizens. They can just deficit spend (on and off-balance sheet) as long as nobody complains. They can spend little, when credit and the economy grow by themselves and when people get wary of the rising prices. They can also spend a lot, especially if times are bad or credit is contracting, under the umbrella of helping the economy out. One thing is for sure, they will spend, and it will be paid for by new money. They won’t raise taxes to 60% to pay for social-security and medicare, they will just create new dollars every year to pay the recipients.
Add up the two components and you get the total inflation.
