Now let's see some of the side effects of inflation, some costs that occur because of inflation. So even if we perfectly anticipate inflation, we know how much inflation there's going to be, well, there are still going to be some costs that we must incur as a society. So let's check out these three that we've got listed here, the most common ones. The first one here is shoe leather cost, and this is resources wasted because you are trying to avoid holding money. Okay? The idea is that prices are going up, and like we've discussed in other videos, holding cash is bad when prices go up because the increased prices mean the cash is just going to be worth less. So this idea of shoe leather cost is the imagery of the wear and tear on your shoes running back and forth to the bank because of having to go to the bank so often because you need more cash or you need less cash, right? You're trying to avoid holding it. So in essence, what it really means is that time and convenience of holding less cash, right? You have to spend more time going to the bank because you don't want to hold it and you need it to earn the interest in the bank. It's not convenient to hold cash anymore because maybe now something costs, you know, if a gallon of milk costs $10,000, right? And now you have to pull $10,000 out of your pocket and you're carrying tons of cash around all the time, all these loads of cash, it's not convenient, right? So these are the shoe leather costs. And now typically, we have low inflation. This is a typical situation where we have low inflation, so it's usually trivial because it's not that big of a deal if the price of milk goes from $3 to $3.20 or something like that, you know, like it's not going to have so many shoe leather costs. Of course, that's a big increase in the price of milk, but it's not going to have a lot of shoe leather cost there. However, if it goes to hyperinflation like that situation where I said now a gallon of milk costs $10,000 and you're carrying all this cash, well, that's going to be pretty serious. So hyperinflation is extraordinarily rapid inflation. It's going to be a really high inflation rate. You're going to know if a professor is talking about hyperinflation. It's going to be an inflation rate generally above 50%, and it does happen. It's happened in recent history, in some countries in post World War I Germany, it happened and Zimbabwe saw hyperinflation, things like that. It does occur. So that's the first one, the shoe leather cost. Let's move on to the next one here, menu cost. So menu cost is the cost businesses face from changing prices. So when a business has to print new price tags out or a restaurant, this is the imagery that it's alluding to here. The menu cost is a restaurant having to print out a new menu because of the changed prices. How weird does it look when you go to a restaurant and you look at the menu and they've put a sticker over the price and you're like, oh man, I totally tell you raised the price on me. That's because they're trying to avoid these menu costs. They're just trying to put a little sticker to change to not have to print a whole new menu, right? Because of these increased costs, they have the increased prices. Now, so you can imagine the more regularly that you have to do this, well, the higher the menu costs are going to be. And what we'll see is in hyperinflation and situations of hyperinflation, imagine if those prices are changing daily, weekly, it's going to be a lot of menu cost because you have to constantly retag everything. Okay? The last one here is kind of interesting, the tax cost because if prices are rising, there might be phantom income that you've made, right? Maybe in our example, we have, you purchase land for $100,000 and there's 10% inflation. So that 10% inflation has brought the value of the land up to $110,000, you had a profit of $10,000. I'm going to tax you on that profit. However, did you really profit? The inflation is what caused that price to rise, not really profit, not really the market value of the land. It was just inflation. So you're going to still have to pay tax, but was it really a gain? Not really, right? We're seeing that the inflation caused the price to rise, so you don't really have any extra purchasing power with that $110,000, the prices have gone up by that same 10%. Cool? So that's about it here. The main ones you want to remember, the shoe leather, the menu, and the tax cost. I think shoe leather and menu cost because they have those funny names, they tend to come up just like multiple choice questions where they want to have you define it, something like that. But overall, pretty standard stuff here. Let's go ahead and move on to the next topic.
12. Unemployment and Inflation
Costs of Inflation: Shoe-leather Costs and Menu Costs