INFLATION, Explained in 6 Minutes - YouTube

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- No, no cool intro, no fancy music.

I just want to explain inflation in six minutes.

I have a degree in economics.

I spent years trying to understand this.

(ominous music)

so let's see if I can boil it down.

What is inflation?

Why is it rising?

Why are people worried?

And what do interest rates have to do with it?

- The Federal Reserve is raising the interest rate.

- [Reporter] Fed is set to raise interest rate.

- Highest inflation in 40 years.

- Listen, I know that I make long videos.

I'm into nuance, I'm into backstory.

Well, this isn't that.

This is quick.

("quick" echoing)

No, really, this is quick.

Let's go.

(rapid electronic music)

Wait, wait, wait, rewind.

Hold on one second.

Before we start the timer, I need to tell you

that I was going to do an ad read

in the middle of the explanation.

Like I was gonna stop the explanation and do an ad read,

but I realized I want this to be an uninterrupted

six-minute explanation, so I'll even take

out the YouTube ads that are on it

so that it can be uninterrupted.

But for now, I need to thank today's sponsor

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Okay, the ad is over, let's start the clock up again

and see if I can do this explanation in six minutes.

Here we go.

- Okay, first up, the simplest definition.

Inflation is when there is more money in the economy

than stuff to spend it on.

But if you're like me, the simplest definition never does

it for you.

So let's try this.

Imagine a village that has one market where people buy

all of their stuff, their food, their clothes,

but one day the government shows up

because they're worried about the economy of this village.

So they tell the people that if they want to take

out a loan, they're gonna make sure

that the banks will not charge them a high interest rate.

They want to encourage the people to take out loans

and spend money.

Oh, and they also drop off a giant pile of cash

for everyone in the village.

And everyone in the village is like, "Sweet,

I'm feeling pretty rich."

Villagers now are going to their market and they're buying

way more stuff.

Many of them have been eyeing the fancy electric bike

in the market that before they couldn't justify.

But now they totally can

because they have all this new money.

The store owner's like, "Sweet. this is great for business."

But he's running out of bikes.

In fact, he's running out of everything

because now all of these people have extra money

and they're buying way more than they used to.

The store owner is like, "I can't keep up

with all this demand, I should raise prices."

And that is inflation.

But the village is all of us and the market is

the entire economy.

When there's extra money floating around

and people wanna spend it faster

than businesses can make stuff, then all of the businesses

in all of the industries raise their prices.

And that is inflation.

It's a natural part of the economy.

It's kind of a good thing in small doses because it means

that the economy is growing.

And it's why movie tickets used to be 25 cents

and now they're like $15.

And slowly over time, it's fine.

Okay, let's go back to the village and see what happens

if we keep going at this rate.

The store owner has now doubled his prices on bikes.

The interest rate is super low so he takes

out a loan to build a new factory to make bikes.

This is good, he's growing a business.

But the government money eventually runs out

and his prices are still double.

But now the store owner has no one to come buy

all of his new bikes.

And now he has this factory and more employees,

but no customers.

He has to shut down the factory, lay off everyone,

and slowly start lowering his prices.

This is called recession.

When COVID shut down the world, governments gave us money,

free money.

They're like don't panic and hoard all your money,

instead spend and borrow and keep the economy going.

Here in the U.S., they literally sent us $3,200 checks.

They gave 600 bucks a week to people who were unemployed

for months and months and months.

They gave subsidies to people with kids.

They increased spending on food stamps.

I mean, trillions and trillions of dollars

of stimulus money.

This was vital aid to people in need,

but even people who didn't lose a job got

a check in the mail.

It was free money for everyone and we spent it.

- I just picked up myself a new bike.

- [Reporter] Demand is up across the country.

- It's time to grind, Peloton.

- We all just got these big checks from the government

during a pandemic.

We're like YOLO, I'm buying a boat or a Peloton or whatever.

- [Man] Pokemon cards.

- [Man] There's Netflix.

- [Woman] Fortnite.

- [Man] A new Motor.

- [Woman] Peloton.

- [Woman] Good soak in a hot tub.

- [Woman] Animal Crossing.

- Push it out a little bit so it--

- No, don't you dare!

- But pair all this new spending with the fact

that the pandemic also made it harder for factories

and ships and retailers to get us all this stuff.

- Supply chain issue.

- Global supply chain.

- Supply chain.

- Supply. - Chain.

- So now you have an economy where people have

way more money than normal and they're ready to spend it,

but the economy can't get them stuff fast enough.

So what do businesses do with all this insane new demand?

They raise prices all at the same time

and that is inflation.

(exhaling)

I feel like we're getting this at this point.

But what do interest rates have to do with all this?

- Raising the interest rate.

- Interest rate.

- Or the Fed?

- Fed.

- Federal Reserve.

- The Federal Reserve.

- Most countries have a central bank, the puppet master

of the economy, the bank of all banks for that country.

But it's not like a normal bank that stores our money

and then lends it out and collects interest to make profit.

That's what a normal private bank does.

The central bank, which we call the Fed here

in the U.S. is run by the government.

So their job is to set the rules or policies

that all the other banks have to follow.

And the central bank isn't motivated by profit,

but rather their job is to babysit the economy to keep

it growing, to make sure people have jobs,

to make sure that prices don't fluctuate too much

so that we can keep growing nicely, no slow down,

no recession, that is what the Fed is there for.

But seriously, the Fed is like a puppet master

and we are the puppets and it's kind of creepy.

They pull strings in the economy to get us to spend

our money in a certain way, which in turn affects

how much businesses raise or drop their prices.

And guess what?

It totally works.

One of the strings that they have to pull

in the economy is called the interest rate.

Wanna borrow money to buy a car or a house

or expand your business?

You're gonna be way more likely to do that

if you only have to pay 2% interest on that loan

as opposed to like 6%.

Lower interest rates equal people

and businesses wanna borrow and spend money.

So during the pandemic, the central bank was like

we need everyone to spend money.

So they lowered the interest rate and people borrowed

and people spent, and it totally worked.

We're like freaking puppets.

So a lower interest rate helped stimulate the economy.

But once again, we're in this same place where there's now

too much money to borrow and spend and not enough goods

and services to spend it on.

So what do businesses do all at the same time?

They raise prices to meet all this new demand

all at the same time and now your money is worth less.

And that is inflation.

- [Reporter] Home prices rising at their highest rate.

- [Man] Astronomical bidding war.

- Are going up. - By nearly 24%.

- So that's what's happening right now.

All the prices are rising kind of at the same time.

What that means is that your hundred dollar bill is

now worth 8% less than it was last year.

Like the same money is worth less

because your purchasing power just got diluted.

And imagine if that keeps happening?

Like instead of 8% it's 50%?

Now your hundred dollar bill is worth what $50 used to be.

And that's when people start to freak out.

And our economy that's built on human psychology starts

to falter and we fall into a recession or a depression,

even, if it gets real bad, which is exactly

what the Fed is built to avoid.

So they're back to pulling their strings

and they've started raising rates.

- The Federal Reserve is raising interest rates.

- The Federal Reserve taking action to try and curb

rising inflation.

- They're gently raising the interest rate to cool down

all of this hardcore spending and borrowing,

see if they can steer the ship back on course.

And let's hope it works.

Okay, did we do it?

Did we do, did we do it in the time period

that I promised I would?

- [Nick] I have no idea.

- We'll find out.

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Okay, last thing I wanna say is a thing that didn't make it

into my little inflation explainer,

but a few years ago when I worked at Vox,

I went to Venezuela and Columbia to do a borders series.

I saw inflation up close and personal because in Venezuela,

inflation got so out of control and they couldn't,

the Fed, the puppet master couldn't figure out

how to get it back in control

that their money became worth nothing.

The prices went up so high

that their money became basically worthless.

You needed like a pile of cash to buy bread.

So what they started doing is they started using

the currency itself to make things.

I visited this guy on the street who was making

purses and bags and sculptures out of cash

because it was worth more as a raw material than it was

as money, as a currency, which is insane.

That's a very extreme version of inflation.

It's happened in several countries that have done this.

We're not in that situation, even close to that situation,

but it's an example

of just how tenuous modern economies are.

They're not pegged to gold or whatever.

They're pegged to a bunch of humans believing

that this stuff is worth something

and it can quickly go off the rails.

So I thought I'd share that little, fun thing

that is more documented in the Vox borders episode

that you can go watch on the Vox YouTube channel.

So that's all I've got.

Thank you all for being here

and I think you should check out, if you want to color

your videos or your photos, I have LUTs and presets

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I think that's sort of it, all the plugs I should do

at the end of these videos, but yeah, lots more to come.

We're working on lots of amazing videos

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So I'll see you in the next one.

Bye, everyone.

Okay.