You've all seen the dramatic rise in money supply in the last couple of years. You've all seen the drop in interest rates to zero. That is the reason we have inflation now and why the Fed is now tightening.
You see, price inflation is always caused by monetary inflation. Always.
Monetary inflation means the supply of money goes up. If demand for money stays roughly stable, which it does nearly all the time, then the price of money must go down. We call this drop in the price of money inflation.
People say that prices of goods and services are going up but really the price of money is going down.
So, when the Fed adds trillions of dollars to the economy, inflation is almost inevitable.
This particular bout is being exacerbated by two government policies:
- Shutting down the economy
- Sending out checks to everybody
Shutting down the economy reduced the ability of the economy to grow supplies of goods caused by the sending of the checks. The checks boosted demand just as supply was shut down.
Now, the Fed is trying to reduce demand and reduce money supply to control inflation. Eventually, it will work. They will reduce inflation but it will likely take one year or more.
But at the same time, the federal government is tightening fiscal policy. The government is running a budget surplus!
Why?
Because corporate and personal incomes are booming. So taxes are rising. In addition, the stock market and crypto markets were booming until recently so capital gains taxes are booming.
So the government is reducing private demand at the same time. That will also control demand and help reduce inflation.
But the classic definition of inflation is too much money chasing too few goods.
So the Fed and the Feds are both reducing demand by plunging the economy into recession. But they are also reducing supply yet increasing supply would also control inflation.
So their policies will work but they are causing massive pain on nearly all but the richest Americans and, really, causing it throughout the world.
So what would King Courtney do?
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