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Why Price Inflation is Going to be Much More Fierce Coming Out of the Lockdown Than It was Coming Out of the 2008 Financial Crash

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Via Economic Policy Journal

Jay Powell, Fed chairman and mad money printer,

AJO writes at the post, Why I Expect an Acceleration in Price Inflation After the Lockdown is Over:

I’m an EPJ Daily Alert subscriber, thank you for the money you have made me in the past few years.

Can you address the “dollar destruction” and dollar bull wing of the Austrian school. They see the dollar going up in value because of foreign demand for dollars in a credit squeeze. Also, many Austrians have been looking for inflation since the last stimulus, but a lot of the new money was numbers on balance sheets that never circulated. Why is this time different other than demand restoration and pent up demand? What cash flow mechanisms turn these balance sheet transactions into price inflation? How does it go from monetary inflation to price inflation this time?

I really do appreciate your insights and you have converted me from a perma bear like most Austrians to understanding the cycle better. Can’t thank you enough. Just wish I had this knowledge ten years ago.

RW

As far as the US dollar is concerned there are many countervailing factors.

On the one hand, during a period of economic uncertainty, there can be a flight to the dollar since it is often viewed as a safe haven.

But there is also downward pressure on the dollar because of all the new money the Fed is generally printing out of thin air. There is, however, an additional factor here in that most other countries are also printing money out of thin air. If they print more aggressively than the Fed, their currencies may fall against the dollar. The dollar under these circumstances will look “strong” but it is really a race to the bottom.

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There really shouldn’t be any Austrian school factions on this subject. Things change over time. You just have to watch the data to get a sense of what are the more powerful influences on the dollar in any given period.

During the Fed money pump at the time of the 2008 financial crisis, a lot of what the Fed did was exchange Fed reserve funds for bank paper, such as mortgage-backed securities. The banks put an awful lot (trillions) back at the Fed as excess reserve deposits. Those funds never hit the economy.

This time it is much different, the money being printed by the Fed (in a complex manner) is going to individuals with checks of $1,200, goosed up unemployment payments, to small businesses and to large businesses and to state and local governments.

It will, literally, in the end, result in trillions of new dollars circulating in the system. It is very different from what Bernanke did during the Great Recession. It is much, much more dangerous. Very few understand this. In Monday’s EPJ Daily Alert, I will show just how different.

RW


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