March 25, 2020
What are prices? A price is simply the ratio of one good to another. Usually a trade can take place when the ratio is met. For example a TV may “cost” $300.00. The ratio of dollars to TV’s is 300 to 1. What determines this ratio is generally the amount of dollars available versus the number of TV’s available. This is usually expressed as “supply and demand”. If MOAR dollars become available for trading for TV’s, the ratio of dollars to TV’s may go up. For example if the number of dollars available doubles, but the amount of TV’s remains the same, we would expect the ratio to be come 600/1 and the price of a TV would be $600.00.
History teaches that increasing the supply of money does not bring greater “wealth”, it brings higher prices. An example comes from the 1400’s to 1800’s when Spain began to bring gold and silver from the New World:
The Price Revolution, sometimes known as the Spanish Price Revolution, was a series of economic events that occurred between the second half of the 15th century and the first half of the 17th century, and most specifically linked to the high rate of inflation that occurred during this period across Western Europe. Prices rose on average roughly sixfold over 150 years. This level of inflation amounts to 1–1.5% per year, a relatively low inflation rate for modern-day standards, but rather high given the monetary policy in place in the 16th century.
We are currently in a panic about a Corona virus. Much of the world’s economic output and trade has been shut down by this panic. This is called a “supply shock”. This means the number of “TV’s” (representing all goods), has gone down drastically. As far as we know the number of dollars available for purchasing “TV’s” has not gone down. This means the ratio of dollars to “TV’s” will go up. It has to do so. If it does not, then no one is buying.
How do you think the Federal Reserve has responded to these circumstances? If you guessed “create MOAR currency”, go to the head of the class! (Thank you Walter Williams). Here is Zero Hedge on Fed actions:
As part of the Fed’s ongoing
nationalizationbailout of the entire market, yesterday we pointed out that in a dramatic reversal away from years in which the Fed would not intervene in the corporate market, the US central bank would now buy Investment Grade corporate bonds, and would even intervene in equities, by purchasing the LQD investment grade debt ETF.
Will this encourage production? I doubt it. I am waiting for my helicopter money. How about you?
“Our” Congress does not want to be left out:
We have a deal, folks!
It appears on early Wednesday morning, the White House and Republican and Democratic Senate leaders reached a deal to keep the American economy humming during the virus crisis and hopefully avoid depression in the second and third quarters.
The new Senate proposal will inject $2 trillion into the US economy, just like a shot of heroin, providing tax rebates, four months expanded unemployment benefits, and several business tax-relief provisions aimed at supporting individuals, families, and businesses, reported The Hill.
There is MOAR:
The deal includes $500 billion for a major corporate liquidity program through the Federal Reserve, $367 billion for a small business loan program, $100 billion for hospitals and $150 billion for state and local governments.
It will also give a one-time check of $1,200 to Americans who make up to $75,000. Individuals with no or little tax liability would receive the same amount, unlike the initial GOP proposal that would have given them a minimum of $600. – The Hill
Have you ever wondered why businesses in this country become fewer and fewer and larger and larger? I think you just got your answer above.
So what do the Fed actions and the Congressional actions achieve (spoiler alert – increase some people’s popularity and not much else):
Oh, sure, handing out billions of dollars via various spending boondoggles ostensibly targeted at those hit hard by the decline in national income may give the impression of having avoided the cost. Ditto for having the Federal Reserve System flood the economy with new money.
No matter how you slice it, however, the pie is still smaller. That won’t change until production facilities reopen and people are allowed to move around. At best, the boondoggles and new money redistribute claims over the now smaller economic pie. They don’t avoid the cost of lost production.
The boondoggles do provide political cover for those enacting them. An electorate unschooled in economics falls for their hook, line, and sinker—seemingly every time. So it is with our government’s attempt to offset the consequences of shutting down economic activity. Lots of pomp and circumstance signifying nothing save the creation of yet more spending constituencies feeding at the public trough.