Principles of Finance: Unit 2, Practical Examples of Inflation: Part I

Check out some practical examples of inflation. And no, there are no balloon animals in this video. Sorry.

CoursesFinance Concepts
Principles of Finance
FinanceFinancial Responsibility
Personal Finance
Finance and EconomicsPrinciples of Finance
LanguageEnglish Language
Life SkillsPersonal Finance
SubjectsFinance and Economics

Transcript

00:23

between the two fighters is the rial rate of return

00:26

and it measures how well you are swimming in a

00:30

rising tide Well why do you care Because if you're

00:33

getting five percent interest in an inflationary world of six

00:37

percent you're actually losing one percent a year in buying

00:41

power like you put one hundred dollars in a bond

00:44

and received five dollars back that year but your groceries

00:48

went from costing you one hundred dollars to one hundred

00:50

six dollars Well the big thing you want to understand

00:53

is the relationship between interest rates and inflation interest rates

00:58

and the dividend yield of the stock market and interest

01:01

rates and liquidity That's the willingness and ability of consumers

01:05

and companies to spend money and the federal funds rate

01:08

as the bass case for everything a ce faras risk

01:12

premiums go right Federal funds rate is the safest rate

01:15

you khun get safest returns so lowest returns All right

01:18

here's the scenario we're in brazil Long time since the

01:21

olympics were held their stadiums have all turned to dust

01:24

The government can't pay for much of anything When the

01:27

soccer ball budget got cut there were riots So the

01:30

brazilian quote fed unquote decides to print a ton of

01:34

money both literally printing on paper and also printing bond

01:38

certificates that it will sell on the open market Well

01:41

what happens to the value of the brazilian currency in

01:44

this situation The whole bad things it devalues or goes

01:49

down or his lesson values that devalue that's bad instead

01:52

of it taking four hundred rail teo buy a carton

01:55

of milk And yes the realest Ironically the name of

01:59

the brazilian currency Well instead of four hundred now it

02:01

takes four hundred twenty five re al so is the

02:04

brazilian fed tightening or loosening in this case it's loosening

02:08

Think of it like mohr money spread around mohr Money

02:12

printed means the value of each unit goes down It's

02:16

Kind of like dilution of the pie in an equity

02:18

investment loosening people are less uptight You own a ninety

02:23

Day brazilian bond iii comes due in ninety days which

02:26

has par of one hundred and pays ten percent interest

02:28

Well after this announcement of printing lots of paper by

02:31

but brazilian fed does the immediate sale price of your

02:34

bond go up or down down yet goes down Interest

02:38

rates just went up well because they have tio if

02:41

inflation is going from seven percent and percent well bonds

02:45

have to track or nobody will buy them because the

02:47

interest rate received on the bond isn't keeping up with

02:51

the amount that prices are going up I either bid

02:53

ask spreads and numbers will adjust to market conditions All

02:57

right well what if you own a thirty year brazilian

03:00

bond in this situation Well upon the making of this

03:03

paper printing announcement does the market value of that bond

03:06

go down more or less than the ninety day bond

03:10

answer Mohr way more think about it like this the

03:13

ninety day bond is still going to be paid back

03:16

and yes it'll be painful Brazil isn't going bankrupt in

03:20

ninety days You'll lose a little money on inflation but

03:23

you'll get your money back and live to fight again

03:24

In ninety days in the case of the thirty year

03:27

paper it's long term and the country notably is selling

03:32

mohr long term paper in large part just to pay

03:35

off their short term paper so that idiots keep loaning

03:38

them money If inflation is bad like fifteen percent or

03:41

higher wealth you can stomach it for ninety days Yes

03:44

it will hurt not that big of a deal Maybe

03:46

the market value of your bond goes from eighty eight

03:48

cents on the dollar to eighty two Bummer You'll make

03:50

worse investments in your life trust us but the thirty

03:53

year bond is a really rail pain You have to

03:57

live with its face value of ten percent in a

04:00

twenty thirty forty percent likely inflationary world for thirty freakin

04:05

years There's not only a lot of risk that the

04:07

government default in that time i goes bankrupt but at

04:11

fifteen percent going on twenty thirty forty you're losing massive

04:15

amounts of riel income that you would have had otherwise

04:18

along the way That's A bad thing when inflation rates

04:21

are higher than bond rates that you're getting just ask 00:04:24.853 --> [endTime] this guy