TAILIEUCHUNG - Ten Principles of Economics - Part 64

Ten Principles of Economics - Part 64. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 28 MONEY GROWTH AND INFLATION 651 regardless of inflation. If there is no inflation in 20 years the pension will have the same purchasing power that it does today. But if there is an inflation rate of only 3 percent per year in 20 years your pension will be worth only 5 540 in today s dollars. Five percent inflation over 20 years will cut your purchasing power to 3 770 and 10 percent will reduce it to a pitiful 1 390. Which of these scenarios is likely No one knows. Inflation ultimately depends on the people who are elected and appointed as guardians of our money supply. At a time when Americans are living longer and planning for several decades of retirement the insidious effects of inflation should be of serious concern. For this reason alone the creation of inflation-indexed bonds with their guarantee of a safe return over long periods of time is a welcome development. No other investment offers this kind of safety. Conventional government bonds make payments that are fixed in dollar terms but investors should be concerned about purchasing power not about the number of dollars they receive. Money market funds make dollar payments that increase with inflation to some degree since short-term interest rates tend to rise with inflation. But many other factors also influence interest rates so the real income from a money market fund is not secure. The stock market offers a high rate of return on average but it can fall as well as rise. Investors should remember the bear market of the 1970s as well as the bull market of the 1980s and 1990s. Inflation-indexed government bonds have been issued in Britain for 15 years in Canada for five years and in many other countries including Australia New Zealand and Sweden. In Britain which has the world s largest in-dexed-bond market the bonds have offered a yield 3 to 4 percent higher than the rate of inflation. In the United States a safe long-term return of this sort should make indexed bonds an important part of .

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