Podcast Summary
Federal Reserve and Inflation: The Federal Reserve is the sole entity responsible for causing inflation through the creation of new money and credits, not external factors like energy policies or supply chain disruptions.
Only the Federal Reserve has the power to cause inflation, not presidents, Congress, or corporations. Inflation, originally defined as the creation of new money and credits, has been commonly misunderstood and blamed on various factors such as energy policies or supply chain disruptions. However, these factors can only lead to price increases if new money is first created by the Federal Reserve. For instance, if the price of oil rises due to decreased supply, people will have less money to spend on other goods, leading to a reduction in demand for those items. The misconception arises because the term "inflation" has been redefined to mean rising prices instead of new money creation. Therefore, it is essential to recognize that the Federal Reserve is the primary cause of inflation.
Oil and Gas Prices Impact on Demand: An increase in oil and gas prices leads to a decrease in demand for other goods and services due to limited available dollars in the economy
An increase in the price of one good or service in an economy ultimately requires a reduction in demand for other goods or services due to limited available dollars. In this imaginary economy example, if the cost of oil and gasoline rises significantly, the economy can no longer afford to spend the same amount on other goods and services, leading to a shift in demand. This principle holds true even in more complex economies like the US, which produces a $30 trillion GDP annually. While some spending on oil and gasoline may be discretionary, the economy can only spend the dollars that currently exist. Therefore, an increase in the price of oil and gasoline will necessitate a decrease in demand for other goods and services, offsetting the price increase.
Fed's role in inflation: The Fed's creation of new dollars is the primary cause of inflation, as it increases the overall supply of money in the economy, leading to price increases.
For prices of goods and services not to be offset by reduced demand for others, new dollars must enter the economy. The Federal Reserve is the primary source of these new dollars. Over the past century, the Fed has consistently increased the supply of dollars, leading to steady price increases. The significant increase in prices over the past four years can be attributed to the Fed creating far more dollars during this period than historically. While commercial banks can increase the money supply through fractional reserve policies, their ability is limited and ultimately relies on new base money from the Fed. Other arguments for price increases, such as excessive government spending, do not directly cause inflation but can create conditions for it. Only when the government borrows newly created dollars from the Fed does it lead to inflation without reducing the purchasing power of others.
Government Spending and Inflation: Government spending beyond borrowing capacity led to currency inflation, not the spending itself, causing a rise in prices. Supply shocks and demand prevention due to lockdown response also contributed to inflation.
The CARES Act and other COVID relief spending signed by President Trump, as well as the Inflation Reduction Acts and other programs signed by President Biden, led to significant government expenditures beyond what could be borrowed. The Federal Reserve responded by creating trillions in new dollars to finance the difference. This currency inflation, not the spending itself, caused a general rise in prices. Supply shocks from COVID lockdowns also contributed to price increases by reducing the overall supply of goods and services while demand remained relatively high. However, the government's response to the lockdowns, which included paying people not to work, prevented a decrease in demand. The idea that corporate greed is the primary cause of inflation is also a common but misguided argument. Corporations always seek maximum profit, and there is no reason for them to suddenly become more greedy during periods of inflation. In fact, they often compete by trying to lower prices to undercut competitors.
Price coordination and inflation: Price coordination among corporations does not cause inflation as consumers adjust spending, prioritizing essential items and forgoing non-essential ones, leading to downward pressure on non-essential goods prices. The Federal Reserve holds the power to influence inflation through monetary policy.
Corporations raising prices in unison cannot cause inflation as consumers will adjust their spending accordingly. They will prioritize essential items and forgo non-essential ones, leading to downward pressure on the prices of less important goods. While there are other theories on inflation, they all fail for the same reason: increasing the price of one product without adding new dollars to the economy will not result in a general price increase. Ultimately, it is the Federal Reserve that holds the power to influence inflation through monetary policy.