Fed’s Kohn on Lessons from Buying Government Bonds….in Britain
Preface:
Recently Dr Jarrell, now a fellow author of this Blog as well as her own, debated the meaning of inflation. That essay, in three parts, may be found in the list of Essays on the right hand side of this Blog. This Post is an extract from a recent Post that Dr Jarrell presented on her own site and is presented here with the hope that, following the essay on inflation, this Post is more widely accessible to you, the reader. Paul Handover.
You’ve zeroed in on the key question, I believe: why is there an inflation risk while the outlook remains so grim?
Inflation is a (sustained) increase in the equilibrium price of goods and services.
The price results from the interaction between two completely independent sides of the market: the demanders and the suppliers. Think of money (or a debit card, whatever form money takes) as an enabler of demand — it makes transactions easier, quicker, and thus more transactions result. The higher the supply of money, the more enhanced the underlying demand for goods and services (by consumers, business, and government).
So more money, higher demand. Higher demand, higher prices. Higher prices, higher inflation.
My first realisation is that I don’t really understand what “money growth” really means. In fact I am little uncertain about money, as a concept!
Are we talking ‘growth’ as in more and more money being lent to the US Treasury Department from the [ever increasing] sale of US Treasury Bonds?
If the sale of these Bonds is to banks or institutions outside the US then there is a flow of money coming into the US via the Treasury Department that then comes into the economy via various Government programmes. Is that correct?
But this is money lent to the US. That means that in order for the US to pay it back (plus interest) there has to be the expectation of taxation income in the future sufficient to meet these debts. As my Pension advisor said, “More credit also means more debt.”
Inflation, deflation, economic crisis and so on, getting to the bottom of meanings.
The background.
Not so long ago there was an exchange between me and Dr Sherry Jarrell about the meaning of inflation. Dr Jarrell is, in every meaning of the words, a qualified economist so when I had the courage/stupidity/ignorance to query her views I could not have been more surprised to receive this:
You won’t reveal a lack of understanding of economics — there are co-existing opposing points of view on the topic – that’s why it made for an interesting discussion! (My italics)
This got me thinking. If your author, who is reasonably well-read about many things especially protecting what little wealth he has, can miss such a fundamental point, then there must be a huge number of other people who, likewise, miss the point and, even more important, don’t even realise it!
Dr Sherry Jarrell
Over the last few weeks Dr Jarrell has not only found time to debate with me, she, too, has realised that a more rigorous exploration of what many economic and financial terms mean has real value for readers of this Blog as well her own Blog.
Therefore I am delighted to welcome Sherry Jarrell to the team of authors.
These essays will attempt to distil clarity out of a number of basic economic ideas, starting with inflation. That seems to be a worry widely ‘predicted’ in the general media as well as elsewhere.
The essay is in the form of a debate format, albeit virtually. We hope it is both informative and educational. Please let us know by leaving a comment!
Are we talking ‘growth’ as in more and more money being lent to the US Treasury Department from the [ever increasing] sale of US Treasury Bonds?
Learning from Dogs 