(electronic music) - No, no cool intro, no fancy music. I just want to explain inflation in six minutes. I have a degree in economics.
I spent years trying to understand this. (ominous music) so let's see if I can boil it down. What is inflation?
Why is it rising? Why are people worried? And what do interest rates have to do with it?
- The Federal Reserve is raising the interest rate. - [Reporter] Fed is set to raise interest rate. - Highest inflation in 40 years.
- Listen, I know that I make long videos. I'm into nuance, I'm into backstory. Well, this isn't that.
This is quick. ("quick" echoing) No, really, this is quick. Let's go.
(rapid electronic music) Wait, wait, wait, rewind. Hold on one second. Before we start the timer, I need to tell you that I was going to do an ad read in the middle of the explanation.
Like I was gonna stop the explanation and do an ad read, but I realized I want this to be an uninterrupted six-minute explanation, so I'll even take out the YouTube ads that are on it so that it can be uninterrupted. But for now, I need to thank today's sponsor because it's literally my job, it's how I get paid. Thank you, BetterHelp for supporting this video and my channel generally.
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Here we go. - Okay, first up, the simplest definition. Inflation is when there is more money in the economy than stuff to spend it on.
But if you're like me, the simplest definition never does it for you. So let's try this. Imagine a village that has one market where people buy all of their stuff, their food, their clothes, but one day the government shows up because they're worried about the economy of this village.
So they tell the people that if they want to take out a loan, they're gonna make sure that the banks will not charge them a high interest rate. They want to encourage the people to take out loans and spend money. Oh, and they also drop off a giant pile of cash for everyone in the village.
And everyone in the village is like, "Sweet, I'm feeling pretty rich. " Villagers now are going to their market and they're buying way more stuff. Many of them have been eyeing the fancy electric bike in the market that before they couldn't justify.
But now they totally can because they have all this new money. The store owner's like, "Sweet. this is great for business.
" But he's running out of bikes. In fact, he's running out of everything because now all of these people have extra money and they're buying way more than they used to. The store owner is like, "I can't keep up with all this demand, I should raise prices.
" And that is inflation. But the village is all of us and the market is the entire economy. When there's extra money floating around and people wanna spend it faster than businesses can make stuff, then all of the businesses in all of the industries raise their prices.
And that is inflation. It's a natural part of the economy. It's kind of a good thing in small doses because it means that the economy is growing.
And it's why movie tickets used to be 25 cents and now they're like $15. And slowly over time, it's fine. Okay, let's go back to the village and see what happens if we keep going at this rate.
The store owner has now doubled his prices on bikes. The interest rate is super low so he takes out a loan to build a new factory to make bikes. This is good, he's growing a business.
But the government money eventually runs out and his prices are still double. But now the store owner has no one to come buy all of his new bikes. And now he has this factory and more employees, but no customers.
He has to shut down the factory, lay off everyone, and slowly start lowering his prices. This is called recession. When COVID shut down the world, governments gave us money, free money.
They're like don't panic and hoard all your money, instead spend and borrow and keep the economy going. Here in the U. S.
, they literally sent us $3,200 checks. They gave 600 bucks a week to people who were unemployed for months and months and months. They gave subsidies to people with kids.
They increased spending on food stamps. I mean, trillions and trillions of dollars of stimulus money. This was vital aid to people in need, but even people who didn't lose a job got a check in the mail.
It was free money for everyone and we spent it. - I just picked up myself a new bike. - [Reporter] Demand is up across the country.
- It's time to grind, Peloton. - We all just got these big checks from the government during a pandemic. We're like YOLO, I'm buying a boat or a Peloton or whatever.
- [Man] Pokemon cards. - [Man] There's Netflix. - [Woman] Fortnite.
- [Man] A new Motor. - [Woman] Peloton. - [Woman] Good soak in a hot tub.
- [Woman] Animal Crossing. - Push it out a little bit so it-- - No, don't you dare! - But pair all this new spending with the fact that the pandemic also made it harder for factories and ships and retailers to get us all this stuff.
- Supply chain issue. - Global supply chain. - Supply chain.
- Supply. - Chain. - So now you have an economy where people have way more money than normal and they're ready to spend it, but the economy can't get them stuff fast enough.
So what do businesses do with all this insane new demand? They raise prices all at the same time and that is inflation. (exhaling) I feel like we're getting this at this point.
But what do interest rates have to do with all this? - Raising the interest rate. - Interest rate.
- Or the Fed? - Fed. - Federal Reserve.
- The Federal Reserve. - Most countries have a central bank, the puppet master of the economy, the bank of all banks for that country. But it's not like a normal bank that stores our money and then lends it out and collects interest to make profit.
That's what a normal private bank does. The central bank, which we call the Fed here in the U. S.
is run by the government. So their job is to set the rules or policies that all the other banks have to follow. And the central bank isn't motivated by profit, but rather their job is to babysit the economy to keep it growing, to make sure people have jobs, to make sure that prices don't fluctuate too much so that we can keep growing nicely, no slow down, no recession, that is what the Fed is there for.
But seriously, the Fed is like a puppet master and we are the puppets and it's kind of creepy. They pull strings in the economy to get us to spend our money in a certain way, which in turn affects how much businesses raise or drop their prices. And guess what?
It totally works. One of the strings that they have to pull in the economy is called the interest rate. Wanna borrow money to buy a car or a house or expand your business?
You're gonna be way more likely to do that if you only have to pay 2% interest on that loan as opposed to like 6%. Lower interest rates equal people and businesses wanna borrow and spend money. So during the pandemic, the central bank was like we need everyone to spend money.
So they lowered the interest rate and people borrowed and people spent, and it totally worked. We're like freaking puppets. So a lower interest rate helped stimulate the economy.
But once again, we're in this same place where there's now too much money to borrow and spend and not enough goods and services to spend it on. So what do businesses do all at the same time? They raise prices to meet all this new demand all at the same time and now your money is worth less.
And that is inflation. - [Reporter] Home prices rising at their highest rate. - [Man] Astronomical bidding war.
- Are going up. - By nearly 24%. - So that's what's happening right now.
All the prices are rising kind of at the same time. What that means is that your hundred dollar bill is now worth 8% less than it was last year. Like the same money is worth less because your purchasing power just got diluted.
And imagine if that keeps happening? Like instead of 8% it's 50%? Now your hundred dollar bill is worth what $50 used to be.
And that's when people start to freak out. And our economy that's built on human psychology starts to falter and we fall into a recession or a depression, even, if it gets real bad, which is exactly what the Fed is built to avoid. So they're back to pulling their strings and they've started raising rates.
- The Federal Reserve is raising interest rates. - The Federal Reserve taking action to try and curb rising inflation. - They're gently raising the interest rate to cool down all of this hardcore spending and borrowing, see if they can steer the ship back on course.
And let's hope it works. Okay, did we do it? Did we do, did we do it in the time period that I promised I would?
- [Nick] I have no idea. - We'll find out. (jazz music) Okay, last thing I wanna say is a thing that didn't make it into my little inflation explainer, but a few years ago when I worked at Vox, I went to Venezuela and Columbia to do a borders series.
I saw inflation up close and personal because in Venezuela, inflation got so out of control and they couldn't, the Fed, the puppet master couldn't figure out how to get it back in control that their money became worth nothing. The prices went up so high that their money became basically worthless. You needed like a pile of cash to buy bread.
So what they started doing is they started using the currency itself to make things. I visited this guy on the street who was making purses and bags and sculptures out of cash because it was worth more as a raw material than it was as money, as a currency, which is insane. That's a very extreme version of inflation.
It's happened in several countries that have done this. We're not in that situation, even close to that situation, but it's an example of just how tenuous modern economies are. They're not pegged to gold or whatever.
They're pegged to a bunch of humans believing that this stuff is worth something and it can quickly go off the rails. So I thought I'd share that little, fun thing that is more documented in the Vox borders episode that you can go watch on the Vox YouTube channel. So that's all I've got.
Thank you all for being here and I think you should check out, if you want to color your videos or your photos, I have LUTs and presets that you can use to color correct your stuff. I also have a storytelling course on Bright Trip where I talk about my methodology for visual storytelling with Nathaniel Drw. I think that's sort of it, all the plugs I should do at the end of these videos, but yeah, lots more to come.
We're working on lots of amazing videos and I'm really excited to share them. So I'll see you in the next one. Bye, everyone.
Okay.
