Wednesday, June 24, 2009

How Much $100 Will Be Worth In Inflationary Economy

Marc Faber (his interview with CNBC is 4 posts down, or here) thinks hyperinflation is coming. Other people think it is deflation that's coming. I am leaning toward inflation. The monetary base is already 100% inflated, and I don't see how the Fed can collapse it back without collapsing the entire economy.

In case it is indeed inflation/hyperinflation, here's a table that tries to show how much US$100 is worth at different inflation rates. I did this exercise a while ago, but I've added a few more columns for hyperinflation possibilities.

Even a benign inflation of 2%, your $100 will be worth 20% less after 10 years, and worth only half after 30 years. If the inflation rate is 8%, $100 will be worth half after 8 years, and retain less than one-fifth of the value after 20 years. If it's a hyperinflation like Mr. Faber is talking about (10 to 20%), the value of the dollar gets halved after only 5 years. This Harvard professor will get his wish; he wants to see 10% negative return on money so people would rather spend like maniacs.

For those of you who are more visually inclined, I plotted the same data in a graph. The dotted blue line near the bottom is 95% from the top ($100).


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