What is inflation and all these buzz words you hear like recession, interest rate...etc? well. Let's dive in.
First things first, inflation basically means people have lots and lots of money than what is
ok to be in the market. This is in basic terms. Now let's see what all of this exactly means.
Imagine you live in a city and people live their normal lives, some are rich, some are poor and some are middle
clas. All of a sudden an airdrop appears out of the sky and gives lots and lots of free cash to the people. of all
social statuses regardless.
Sounds like heaven right? but this is the tip of the problem.
Now people with all of this money suddenly feel rich and they decide to buy that system76 mechanical keyboard that
they always wanted. Or build that sex dungeon they always dreamt about or...let's stop here. You get the idea.
Now what happens is there's a ton of demand with the same supply. Remember only people are richer now and they
have more money, The supply, which is the keyboard and sex dungeon
materials...etc. are still the same count. So suppliers can't keep up with this huge demand and what's
logical to do here if
you're a supplier?..... you raise prices. That's right. And that, ladies and gentlemen, is
inflation. Things are more expensive now.
Something to note here is this happened in the US during Covid. They gave out trillions (around 5 of them, google
it) of money in terms of stimulus checks...etc. And how and who did do this? The central bank.
Now who and what is the central bank?
They're not just a regular bank like the one you have an account with, they're the big guys watching over the
economy and giving out money and loans to the bank you DO have an account with. Pretty big huh?
So what they can do and did during covid was they lowered the interest rate. But what is the
interest rate? basically a % you have to pay back when you loan money from a bank. And they took it down from
something like 6% to 1%!
You see this and you're happy with this amazing offer, you go and take out a lot of
money as loans.
Yeah the government thought it's covid everybody's home lets just keep them home and give them free money.
So people keep on spending but eventually this money runs out right? and prices are still high! so
what you have now is people with lesss and less money but very high prices, people no longer can afford the supply
so businesses have to lower prices now..... this, ladies and gentlemen is called a recession.
Now if this recession is a very downward sharp movement (and I'm overly simplyfying things here)
then this is called a depression!
So there you go, inflation, recession, depression, central bank and interest rates in this "blog"
You can follow what's happening in the US right now to get a better "feel" of this unfolding in real life. Have fun!
:)