E Financial Bubbles (Part III)

Does the process of FED purchases constitute inflation? Yes, and in a large way. It is inflation since there was additional issuance of credit above the amount of wealth created, and there was no wealth created. When the FED purchases a government bond, the US Treasury receives the money, and now can spend this money in any authorized manner.  All things being equal, the spending allowed by the newly created money places demands on existing wealth or other resources in the economy, thus driving up their price.

One more key point...Since all credit is issued with interest considerations (rental of money over a period of time), where does the money originate for the interest?  It could come from new wealth created.  In the case of government with trillions of dollars in debt ($19+ trillion for U.S.), where do the hundreds of billions of dollars in annual interest payments originate? The answer is that the source of the interest payments is the same as the initial credit, which is to say, more credit. Thus, our present credit system relies on continuous amounts of credit creation in order to feed itself.

Consider this…The US Mint produces one dollar silver coins (99.5% real silver content). The coins are legal tender since they represent the same currency value as a one dollar bill. If purchasing a soft drink for one dollar, which would you use, the one dollar silver coin or the one dollar paper bill?  Consider the reason for your answer. You know intrinsically that the one dollar silver coin represents something besides what it says.  In fact, you can exchange the dollar silver coin for several of the dollars of the paper variety. The example represents one of the most understandable examples of inflation. 

Since the 2008 financial crisis, central banks worldwide have attempted to create inflation and have been mostly unsuccessful due to the strong deflationary winds in existence. What will the Wizards think of next?

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