QUESTION 1 : I believe the Federal Reserve and our government are trying to disg

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QUESTION 1 : I believe the Federal Reserve and our government are trying to disguise the inflation rate by tying it to a basket of goods and then ignoring the rapid rise in the price of several items. On one of the slides for this portion of the course I list all the items in the basket of goods, Listed in the basket are, among many other things, housing, energy (gasoline, natural gas, etc.) and food. In the past several years the Bureau of Labor Statistics has dropped all three because they are too volatile! Why are the volatile? Because the government is borrowing heavily to finance it's debt caused by over-spending. This means there is more money in the economy chasing the same amount of goods. When demand rises while supply stays relatively constant, the price will rise to ration scarce goods---Keynesians say that demand will pull the price up. No mater what it's called it was caused by more money flooding the market thereby increasing demand for products with a limited supply. Don't tell the Keynesians but that's inflation. The expansion of the money supply and/or the extension of credit is inflation. Who is the only one that can legally increase the money supply? The government! When they do it, it is called sound monetary policy. When we do it, it's called counterfeiting. They pat themselves on the back and we go to prison. At the moment the Bureau of Labor Statistics is not counting Food. Why? Once again it's said to be too volatile. Really! And who did that? Have you bought groceries lately? There are four money measures: M1 (money), M2 (near monies), M3 (everything that acts as money on the market), LIBOR (the London Interbank Offering Rate). I have slides on this site that will show the monetary makeup. They no longer count M3 because it's difficult to calculate. Really? I do it every Saturday in about a half hour. Why can't the thousands of government economists do the same calculation? They have, recently, created M0 to allow the government to more narrowly define the money supply and at least partially hide the inflation rate. Once again it's a government slight of hand dedicated to making sure you never realize the full extend of their money creation. They do this to finance their debt. The government borrows $100, pays it's bills and they repay the debt with dollars that are worth less than those they borrowed (they have through borrowing increased the money supply) This is also inflation! Inflation is a tax! The government does not have the courage to tax you directly so they do it indirectly. They then blame the companies who are forced to raise prices as the costs of their inputs start to rise! Ask yourself, if food prices are rising rapidly---bought groceries lately?---why is food not included? Why not be honest with the people? There are 4 embedded questions. QUESTION 2 : Thomas Jefferson once said "Never give your best friend power you would not want your worst enemy to have." Yet we have created a monster by the name of the Federal Reserve Banking System. Not to worry we are told because the Solons in the government have the monster successfully chained down. It is simply, we are told, a method for the government to borrow money while it waits for revenues to catch up with accounts receivable. Of course, all major businesses face the same problem. To help alleviate the problem they have retained earnings. They also arrange for a line of credit with a bank or sell corporate bonds (IOUs). The accounts receivable are pledged as collateral for repayment. While this is true for government as well, government continuously spends far more than it takes in. This would be fine if there were a plan to pay off the loans when times were good and the money was flowing in faster than anticipated. It isn't! Which means the government must borrow ever increasing sums to help pay for the mounting debt, and interest payments, being accrued at an ever increasing rate. Where does it all end? Bankruptcy if you are a business. Repeat of the third century AD in Rome if you are the government. But haven't we created another more serious problem.problem? Who's watching the watchers? Or perhaps we should say: God help the chickens when the fox is the judge! One of the most potentially dangerous functions of the Federal Reserve is it's ability to create money out of thin air. Of course it also allows the ability to destroy money once loans are paid off. If I deposit $100.00 in the bank because I have no immediate need for it but I would like to use it at some future date. The bank cannot afford to pay me interest on the money unless they have some method of also receiving a return on the deposit. They loan it out to get a return. Instead of me loaning the money directly to another person the bank acts as a mediator. It finds someone who would like to borrow $100.00. They loan the money to him in return for a charge for the use of the money---lets say $5. Interest is the payment for the use of money. Incidentally this is also how Wall street works. Middlemen bringing companies looking for investors, and people who want to invest, together. We now have a deposit for $100.00 that can be withdrawn at any moment. With that deposit the bank can created additional money out of thin air in the form of a loan. When a person applies for loan they sign a promissory note (not money) and exchange it for a demand deposit (checking account) which is money. This is called monetizing the debt. We have taken something which is not money---a promissory note---and we have created a demand deposit---which is money---to pay for the loan. We have just created, and added, more than our initial deposit of $100.00 to the economy. We actually create a multiple of our deposit. It would be dangerous enough if the Fed only loaned the government money but, through the Federal Reserve banking system, money is loaned to businesses and individuals. With more money circulating in the economy, the demand for goods and services goes up. Prices also go up---demand pull inflation. The price increase is inflation as the demand for products now exceeds the current ability of business to supply the goods or services. Another way of expressing it is to say "Price rises to ration scarce goods." Once the loan is repaid the $100.00 disappears from the banks computer. Money is destroyed or, as the Keynesians like to say, "We are suffering from deflation." But what is deflation if it is not the market trying to reduce buying power but rather the market trying to return to its natural level.It wants to go back to the price level that was in effect before the government, through the Federal Reserve, raised it. We have increased the money supply by more than $4.5T in 7 years! So how can inflation be less than 2 percent? Inflation is nothing more than the expansion of the money supply and the extension of credit (making loans). The only ones who can legally do that is the Federal Reserve. If you and I do it, it is called counterfeiting! When the government does it, it is called sound monetary policy. Is our current spending level sustainable? Is our national debt level sustainable? Why or Why not? There are 4 embedded questions.

Explanation / Answer

Food and energy products can have supply shocks which may considerably alter their price levels. However, an increase or decrease in the price levels of these products does not necessarily reflect the trend of the price level in an economy. The changes in the prices of these products are mostly due to temporary factors which are self-correcting in nature without any need of monetary policy interventions. Hence, inclusion of these products while calculating inflation may distort the overall price level trend of the economy. A cautious approach of measuring inflation in terms of core inflation and overall inflation may prove useful to economists under different circumstances.

Federal spending is increasingly outstripping its revenue, which will eventually lead to soaring of the Fed debt and harming the economy in turn. This spending and revenue imbalance is considered an unsustainable long term fiscal path for the US economy as the debt to GDP ratio could shoot up in the coming years. The major causes for this imbalance are the growing spending on entitlements -- Social Security, Medicare and Medicaid. US government debt is running at 82% of GDP which would require major overhaul in terms of increased taxes and, reduced public spending. If the national debt keeps running at this rate, then in the long run, chances of government default increases which would in turn lower the investor confidence and decrease investment. This may increase the price inflation that reduces the existing debt’s relative value.

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