E Overheated Economies Do Not Cause Inflation

Board, Blackboard, Economy, Inflation, Money

Janet Yellen said the following last week...

It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat” 

Later that same day, she said this...

“It’s not something I’m predicting or recommending. If anybody appreciates the independence of the Fed, I think that person is me, and I note that the Fed can be counted on to do whatever is necessary to achieve their dual mandate objectives.”  

Also last week, we heard from the Federal Reserve which released the following statements  on Thursday, May 6, 2021...

  • Rising asset prices are posing increasing threats to the financial system, the Federal Reserve warned in a report Thursday.
  • “Asset prices may be vulnerable to significant declines should risk appetite fall,” the central bank said.

Before we can understand how to interpret these statements and any possible conflictions, there are four key topics which need to be explained: inflation, the Federal Reserve, interest rates, and the economy. 

INFLATION IS CAUSED BY GOVERNMENT

Inflation is the debasement of money by government and central banks. The debasement is accomplished by continually expanding the supply of money and credit. Also, the inflation created by the Fed is intentional.

The Federal Reserve has been expanding the supply of money and credit intentionally for more than one hundred years.

FEDERAL RESERVE IS A BANKER'S BANK

The purpose of the Fed is to provide a structured environment for the creation of money, so that banks can lend money (i.e., a banker's bank). The expansion of the supply of money and credit (inflation) allows banks to continue to lend money in perpetuity.

The Fed's inception in 1913 was authorized by Congress with the understanding that the Federal Reserve would try to mange financial activity in such a way as to avoid panics and crashes.

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Disclosure: Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT  and   more

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