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Principles of finance ah la shmoop practical examples of inflation

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part one dust off your a macro economic sex book

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that's probably where you first encountered the concept of the

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octagon smackdown between interest rates and inflation What we're focused

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on in this lesson is basically who's Winning the spread

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between the two fighters is the rial rate of return

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and it measures how well you are swimming in a

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

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getting five percent interest in an inflationary world of six

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

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power like you put one hundred dollars in a bond

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and received five dollars back that year but your groceries

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went from costing you one hundred dollars to one hundred

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six dollars Well the big thing you want to understand

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is the relationship between interest rates and inflation interest rates

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and the dividend yield of the stock market and interest

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

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and companies to spend money and the federal funds rate

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as the bass case for everything a ce faras risk

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premiums go right Federal funds rate is the safest rate

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you khun get safest returns so lowest returns All right

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

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olympics were held their stadiums have all turned to dust

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

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soccer ball budget got cut there were riots So the

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brazilian quote fed unquote decides to print a ton of

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money both literally printing on paper and also printing bond

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certificates that it will sell on the open market Well

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what happens to the value of the brazilian currency in

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this situation The whole bad things it devalues or goes

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

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of it taking four hundred rail teo buy a carton

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of milk And yes the realest Ironically the name of

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the brazilian currency Well instead of four hundred now it

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takes four hundred twenty five re al so is the

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

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Think of it like mohr money spread around mohr Money

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

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Kind of like dilution of the pie in an equity

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investment loosening people are less uptight You own a ninety

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Day brazilian bond iii comes due in ninety days which

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has par of one hundred and pays ten percent interest

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Well after this announcement of printing lots of paper by

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but brazilian fed does the immediate sale price of your

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bond go up or down down yet goes down Interest

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rates just went up well because they have tio if

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inflation is going from seven percent and percent well bonds

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have to track or nobody will buy them because the

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

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the amount that prices are going up I either bid

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ask spreads and numbers will adjust to market conditions All

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right well what if you own a thirty year brazilian

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bond in this situation Well upon the making of this

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paper printing announcement does the market value of that bond

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go down more or less than the ninety day bond

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answer Mohr way more think about it like this the

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ninety day bond is still going to be paid back

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

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

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

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In ninety days in the case of the thirty year

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

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mohr long term paper in large part just to pay

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off their short term paper so that idiots keep loaning

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them money If inflation is bad like fifteen percent or

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higher wealth you can stomach it for ninety days Yes

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it will hurt not that big of a deal Maybe

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the market value of your bond goes from eighty eight

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

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worse investments in your life trust us but the thirty

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year bond is a really rail pain You have to

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live with its face value of ten percent in a

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twenty thirty forty percent likely inflationary world for thirty freakin

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

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government default in that time i goes bankrupt but at

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

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amounts of riel income that you would have had otherwise

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

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

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