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Friday, July 23, 2021

Inflation is the objective

 The idea that you can flood the nation with trillions of dollars created by the Federal Reserve without a concomitant increase in the amount of goods and services will not lead to inflation is so bizarre that anyone who holds this view should be banned from giving financial advice.  The only question is “how much.”  

One statistic I have seen is that the Fed is creating new “money” to cover roughly one-third of the federal deficit.  

Imagine if you will that the Federal Reserve gives everybody $1 million dollars.  They can do that with a little help from the Biden Administration.  After all, that’s not such a big stretch from sending everyone a $1400 stimulus check.  Just a few extra zeros.  Suddenly the demand for steaks and lobster would explode, as would the demand for new cars and Rolex watches.  But the supply of steaks and lobsters, cars and Rolexes is not that elastic so you would see some serious price hikes as shoppers bid for the limited supply.   After a while, the supply/demand balance would come back into balance leaving the price of beef at, say $500/pound and the price of a new car at $200,000.  The sad part is that all those millionaires wouldn’t be better off.  There’s a limit to how far a million will go.  So they will be back to  buying Big Macs, now priced at $100.  

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