Postage rates are going up tomorrow. A first class stamp will now cost 44 cents. Some people are protecting against postage rate hikes by purchasing Forever Stamps. These stamps are purchased at the going rate, and are good forever. I like them because it means I don’t have to buy additional 1 cent or 2 cent stamps to cover the difference. It is worth noting that postage — by law — can never outpace inflation. Therefore, points out My Money Blog, stockpiling the Forever Stamps as a hedge against inflation isn’t much of an investment plan:

However, there is no point in stocking up on them, because Forever stamps are not a good investment. For one, postage rates have not outpaced inflation historically. But more importantly, according to the 2006 Postal Accountability and Enhancement Act, the postage rate will never be allowed to outpace inflation.

Indeed, there are better ways to save on postage. My favorite way to save on postage is to do online billing. Most of my statements come via email, and I pay them over the Internet or automatic withdrawal. This makes things easy as well as saving money on postage. I do use stamps on letters and cards sent to my grandparents. As long as they still want something a little more tangible (and many people the age of my grandparents do), I’ll need stamps. But buying a few Forever Stamps now means that I probably won’t need to buy new stamps for years.

image credit: Miranda Marquit — photo USPS stamps

At first, when I heard that the government is considering to buy so-called “commercial paper,” my reaction was rage. But I’ve calmed down and thought things through a little bit. This might be a needed action on the part of the Fed.

But first, a brief tutorial:

Commercial paper is basically an unsecured loan that businesses make to each other. It’s like when you get out the credit card toward the end of the month to smooth things out as they get a little tighter. Basically, a company says, “I need $500 million to make payroll this week, but income has been a bit down. I don’t have $500 million in ready cash.” Then the company goes to another company, that has a surplus, and says, “I’ll give you this I.O.U. for $600 million if you front me $500 million to get me through the week.”

This isn’t happening anymore. The liquidity isn’t there. Banks aren’t lending to each other, and the $700 billion bailout hasn’t done anything to thaw the credit market freeze. That is why the Fed is stepping in. Supposedly, Fed actions aren’t going to really use our taxpayer dollars, because the Fed can do things to create its own “money.” It will either buy the unsecured debt outright, or issue emergency short term loans. In either case, liquidity theoretically will be increased, easing the credit market situation. It will probably result in inflation as well. (For an interesting argument on the necessity of inflation to get our economy on track, read this post on Stock Trading to Go.)

What does a credit freeze mean for you?

More dangerous than a stock market crash, a credit freeze has direct consequences for the reast of us “regular” folks. Most of us see it in terms of personal credit:

• Car loans.
• Private student loans.
• Mortgage loans.
• Credit cards.
• HELOCs are being frozen.
• Interest rates go up in some cases, especially on mortgage loans.

In some cases, this might be a good thing. It means that we have to re-evaluate our priorities and figure out what we want to spend our money on.

There are indirect effects as well, though.

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I received this interesting question from a reader last night:

I’ve been hearing a lot about inflation lately. But now I’ve started to hear about deflation. What is deflation?

An excellent question! At its most basic, deflation is a fall in prices. It is the opposite of inflation. In the sense of this economy, deflation is most connected with the stock market and with housing prices — both of which are falling. (Consumer prices haven’t quite reached a state of deflation, so it’s not very helpful to household budgets.)

One of the biggest worries right now is that the economy will enter a deflation spiral. This is a great fear on the stock market, as there is a pullback in investment as  stock values (especially in the financial sector) fall. If you have a retirement account, or if you have stock investments that act as passive income, this sort of deflation is going to affect you.

Another concern is the continued fall in home values. As less equity is available in homes to provide support for spending, less spending happens. And this can create deteriorating economic conditions. Deflation also brings liquidity problems. Money does not flow as easily, and banks are not willing to lend to each other — or to you.

Inflation: the solution to deflation

As a result of deflation fears, the Federal Reserve authorized central banks around the world to release dollars into their economies (the Bank of Japan, for example, is now offering loans denominated in U.S. dollars) in order to increase liquidity. The idea is that by releasing more cash into the market, inflation will result in order to battle the deflation.

Don’t ask where the money for all this liquidity injection comes from, though. Because, basically, it comes from the promise of future returns on debts owed to the Federal Reserve. And some of it is, in fact, just being created out of thin air.

image source: Wikimedia Commons

Could dollar stores be headed the way of the dodo? It’s quite possible. One famous under $1 store has had to raise its prices. BloggingStocks reports that 99 Cents Only is upping its prices to 99.99 cents. It’s still technically under a dollar, but for practical purposes everything is going to be rounded up to $1.

The inflation going on right now (crazy inflation — my grocery bill can no longer be kept under $100) is making these discount stores reconsider policies of “Only $1″ and “Everything less than $1″. It just can’t be done.

99 Cents Only is not the only discount store to be having these problems. Indeed, I expect many of these stores will be changing their names soon.

Right now, the big news is that inflation is at its highest levels in 17 years. There are a couple of ways to look at inflation:

• As a rise in prices.
• As a decline in the value of your money.

Either way, inflation has a very real effect on your personal finances. And it’s not just “regular folks” feeling the pinch. Millionaires are feeling the pains of inflation as well.

Here are 5 ways that inflation can affect you:

1. Cost increases. This is the most obvious way that inflation can affect your personal finances. Your food, energy and other products increase in price. Additionally, you will find that loans often cost more, as inflation causes interest rates to rise.
2. Investment returns. From your retirement account to your savings account to your online brokerage stock portfolio, inflation can knock your investment returns. Your returns are lower in times of inflation, as companies grow slower — and can even go negative. Additionally, inflation erodes your return rate on your investments.
3. Cost cutting by companies. As inflation cuts into company profits, you will find that there are efforts to stem the outflow. This means that some benefits and perks may be left out. And, in this sort of an economy, it is no surprise when downsizing becomes a regular part of the job picture. You might lose your job.
4. Infrastructure development. The roads you drive on and the grid that carries your electricity are all results of infrastructure development. As costs go up, governments slow their projects. This can affect you in terms of car maintenance, time spent going somewhere, the efficiency at which you receive power and any number of services we have come to expect from the government.
5. Higher taxes. Inflation tends to lead to higher taxes. Money to pay for all the things we expect has to come from somewhere. And as those bills get bigger, so does the tax bill for individuals.

Can you think of any other effects of inflation?

The big news from the weekend is that the Senate passed the housing relief bill that has been wending its way through Congress for the past few weeks. And President Bush has promised to sign the bill into law, meaning that soon some folks will see some relief.

But the bill does more than simply bail out the participants in the mortgage market mess. Others may benefit as well. Here’s who will benefit from the housing relief bill:

• Fannie Mae and Freddie Mac. These two government sponsored enterprises (GSEs) are getting the ultimate bail out. The housing relief bill authorizes the government to extend even more credit to the mortgage lenders, as well as to buy equity in the companies and make emergency loans. Happily, the bill also institutes a regulation of GSEs — something that has been sorely lacking and one of the reasons that Fannie and Freddie have capitalization that would bring any truly private company down.
• First-time Homebuyers. The bill offers a tax benefit of the lesser of 10% of the home’s purchase price or $7,500 to first-time homebuyers. Nice for first-time buyers. But where was this incentive last year, when I was buying a home?
• Homeowners facing foreclosure. Some homeowners facing foreclosure (an estimated 400,000) will be able to refinance their loans through the FHA. I think, though, that this is likely to merely delay the inevitable. Not to mention that 400,000 is just a drop in the bucket compared with the estimated more than 2 million foreclosures through 2009.
• US Creditors. Congress is raising the cap it has on the national debt

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Today, Federal Reserve Chairman Ben Bernanke went before Congress and testified that economic risks remain. Indeed, departing from his usual, “the economy is on the road to recovery” line, Bernanke made it clear that he is uncertain about a great deal in the economy. He also pointed out that inflation is a very real concern. Extra concerning, in fact, since there hasn’t been complementary economic growth to blunt the effects.

I think he forgot to mention, though, that the orgy of interest rate cuts the Fed made to build “confidence” in the stock market played a very large role in the inflation we are seeing.

President Bush tells us not to panic

And, of course, President Bush also addressed the American people today, reiterating that our financial system is not on the verge of collapse and that panic is not a good idea.

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This morning, Ben Bernanke delivered an address to an international monetary conference in Barcelona via satellite. His message was mainly one of optimism laced with caution.

One of his cautions was this: That inflation could be a self-fulfilling prophecy. Yahoo News reports on the idea behind inflation as self-fulfilling:

If consumers, investors and businesses believe inflation will continue to go up, they will change their behavior in ways that aggravate inflation, turning it into a self-fulfilling prophecy.

Were consumer prices to keep climbing over a sustained period, that might “lead the public to expect higher long-term inflation rates, an expectation that could ultimately become self-confirming,” Bernanke said.

This is a good point. Be frugal, and plan for the future, but don’t panic. Get your personal finances in order, but be calm about it.

As long as you are prepared, and as long as you are reasonable about the steps you take, you will find that you can beat inflation. And if we all take a measured approach, it is possible that inflation may not happen. Perhaps we could make that our self-fulfilling prophecy.

I expect to see more questions for the Ask the Piggy Bank feature as we head into continued economic uncertainty. Today’s question, which is especially timely, is this:

What is stagflation?

This word has been floating around for a few weeks, but it’s really becoming prominent as Fed chair Ben Bernanke denies that it is happening. Here is a basic look at what stagflation is:

Stagflation is the combination of two words: “stagnant” and “inflation.” It is used to describe economic conditions in which growth is slow (or virtually non-existent), even though inflation is in effect.

Stagflation is considered a phenomenon, since inflation is usually coupled with economic growth. The rise in prices, coupled with the lack of a requisite increase in spending power by consumers, is what makes stagflation so dangerous.

When we think of inflation, we often think of rising prices. But Natural News offers an interesting alternative look at inflation:

Most people think the word inflation means rising prices. But the precise definition of inflation is an increasing supply of money which results in the appearance of rising prices. In real terms, prices have not gone up. It is only that the value of the currency has depreciated so that it takes more and more of it to buy something. 

Natural News uses the example of gold prices. Gold prices have remained stable, the writer argues, but the US dollar has depreciated to a point that it costs nearly $900 to buy one ounce of gold now as opposed to $35 in 1913.

Many lay the problem of inflation squarely on the monetary policy of getting away from the gold standard. And there are very valid points to this argument. After all, the US dollar is no longer backed by any tangible asset. Instead, it is backed by the fact that the Treasury can always print more money.

What do you think of where our US dollar is headed?