(electronic music) - 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 because it's literally my
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for supporting this video. 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. (jazz music) 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 that you can use to
color correct your stuff. I also have a storytelling course on Bright Trip where I
talk about my methodology for visual storytelling
with Nathaniel Drew. 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 and I'm really excited to share them. So I'll see you in the next one. Bye, everyone. Okay.
