Interest Rates and Inflation

Saw some interesting ideas on inflation. The analogy Econo-Girl uses to represent the idea is a string being pulled at both ends. One end is supply. The other end of the string is demand.

When supply is low, that end of the string is being pulled back. When demand is low, that is the end that ismade slack.

So a healthy economy has a reasonably stable rope that more or less stays in place. If the supply end of the rope gets too slack from oversupply, then it takes less force on the demand end to pull. That's a lower cost to get supply.

Please have patience. Econo-Girl is just working out the kinks in this analogy.

With Katrina, supply has tightened up. So it takes more demand, and the willingness to pay more, to keep the rope stable. That means inflation.

Why does Econo-Girl think she is the only one who is going to believe this crazy analogy?

Runaway inflation is when supply is pulling back more and more, and in response, demand rushes forward to get more goods. That only prompts more pulling from supply. Soon the rope is dashing across the lawn. It is no longer a rope standing still. It is no longer a stable economy.

So what if the rope is stable, and then supply starts getting bigger and creating slack. If demand is low and stays there despite lower prices for supply, the rope is not taut, but loosely hanging. That is a recession. When the rope hits the ground, it is a depression. The rope is on the ground because there is no pull from either supply or demand.

Is anyone else out there having fun with this?

Econo-Girl thinks she will develop a series of graphics to demonstrate her idea better. Using an actual rope would be a good way to explain basic economics to children.


The Lazy Iguana said...

Not a bad analogy.

The thing is that nobody else wants to think about this topic. They just keep borrowing and borrowing and figure that everything will be ok.

This is why I read your blog. It keeps me from thinking I am insane.

Econo-Girl said...

Wow! That's such a big compliment. I like to read your blog because it always makes me laugh, and I need that.