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what has been happening in the U.S economy the FED prints all this money yet that money doesn't lose a lot of value look at the exchange rate of the dollar versus other currencies we've had this massive explosion of money printing big increase in the fed's balance sheet but on a relative basis the dollar hasn't lost a lot of value relative to other currencies despite the fact that we've dramatically increased the supply imagine if the United States existed as an island we didn't trade with any other Nation so any money the Federal Reserve printed just stayed within our borders it didn't go anywhere right and so the only stuff you could buy with the money the FED printed was the stuff that we made here domestically because that was the only source of goods well obviously the effect would have been much different because if the FED prints a bunch of money and we don't have any stuff we're not producing we don't have factories making stuff then the price prices are obviously going to go way up but there was kind of like an escape valve that allowed the FED to print a lot of money and it not push up the price of goods and that was the fact that we have a whole world out there that was able to produce the goods that the U.S economy couldn't and we were able to take all the money that the Federal Reserve printed and then use that money to buy all those goods that were made outside the United States so the FED prints money the government gets it sends it to Americans Americans take that money and buy Chinese Goods with it and now the Chinese send us their goods and we send the Chinese our money so the money the FED creates is shipped abroad so it's not in America bidding up prices but now the goods that the Chinese produced they get shipped to America so now we have all those extra Goods to keep a lid on prices and if you look at the breakdown of the CPI between goods and services if you just look at Services you've seen a substantial increase in prices even with the government rigging the CPI because the cost of services has actually risen by more than what the government admits but if you strip out Goods you'll see a much bigger increase in prices why because we can't easily import those Services there isn't a foreign alternative you can't Outsource that stuff because the services have to be performed locally but when it comes to Goods more and more Goods have been outsourced to cheaper production economies like China and so that's kept the lid on Goods prices and so when you average the goods prices with the service prices that's kept the measured rate of inflation lower I mean think about the low production costs in a country like China which you know 20 years ago they were just starting out they went through a long period of time where they had a communist system not just in name but in practice and so you had a lot of very poor people and as they began to embrace capitalism wages started at a very low level and of course they didn't have a lot of the rules and regulations that we had they didn't have all these Environmental Protections and so the cost of manufacturing and the cost of Labor Capital was all much lower in a country like China and so we were able to Outsource that production in order to keep costs down even as the Federal Reserve was printing money and of course the money that we were printing we were sending abroad see now normally this wouldn't work because if you ran a big trade deficit like the one the U.S is running your currency would crash because your trading partners would have all this currency but they'd have nothing to buy because the whole purpose of trade is that you export to import you have a concept of comparative advantage and if as a nation there are certain things that you can produce efficiently and there are other things that you can't rather than producing everything you produce just what you can make efficiently and then you trade that for the things that you don't produce efficiently because maybe your trading partner can produce that more efficiently and so by everybody concentrating on what they make efficiently and then trading everybody ends up with more stuff higher living standards lower prices but the goal of your exports is to pay for your Imports you don't just export for the sake of exporting that's just a waste of resources you export to pay for your Imports but what about America you've got China and other countries exporting the United States they're not getting Imports they're getting dollars and because the US is the reserve currency those dollars are actually valuable and so our trading partners are content or have been in the past to exchange the products that they produce for the money that we print now their willingness to continue to do that and pursue this arrangement I think is coming to an end I think the world is going to Tire of exchanging real goods for our paper especially when they understand how much less that paper is going to be worth in the future than it is now when they realize the box that the FED is in with respect to its ability to control inflation and the fact that government deficits are going to keep on getting bigger and bigger and bigger putting more and more pressure on the Federal Reserve to monetize those deficits and in fact the reason that the deficits were able to get so big in the first place was because of this Arrangement because foreigners were willing to hold on to our U.S treasuries and keep interest rates artificially low that emboldened the government to go even deeper into debt because normally a government that was this profligate would be punished by higher interest rates and that punishment would change their behavior and cause more fiscal responsibility but we never got punished and as a result of that we continue to pursue even more Reckless policies than we had of the past and so foreigners actually helped encourage this and ultimately now they're going to be the ones that are going to put on the brakes because they're going to stop enabling all of this debt but it's going to be the Federal Reserve that is going to ultimately replace foreign buyers of U.S treasuries but of course when foreigners buy U.S treasuries there's no new dollars created they buy treasuries with the dollars that already exist but when the Federal Reserve has to buy those treasuries they have to produce even more dollars to finance it which is inflation and of course if those dollars stay here if they're not exported then they are going to be bidding on prices and this is what Powell doesn't understand we are not going to be able to continue to export our inflation to the degree that we did and we're going to start to see Goods prices rising now and of course Even If the Fed had an increase the pace of its money printing the benefits of Outsourcing our production to countries like China was bound to diminish over time as Chinese wages go off as production costs go up there is less of a benefit of continuing the shift production abroad and of course as we've shifted more and more production abroad there's less incremental benefit from shifting more see in the early days of Outsourcing we got a lot of bang for the but over time that impact is lessened and so the benefit that we got of having our consumer prices reduced as a result of that is also getting diminished so it was going to happen anyway but we've now dramatically accelerated it and of course there was another big benefit to this Arrangement where we run huge trade deficits foreigners send us their stuff so that we have Goods to buy and we send foreigners our money was that foreigners took that money and they bought Financial Assets Now number one yes they bought U.S treasuries mortgage-backed Securities so all of this work to keep interest rates low and that helped prop up the stock market prop up the real estate market but they also directly bought U.S stocks it wasn't that they just bought treasuries to keep interest rates low to improve stock market valuations they actually bought U.S stocks people all around the world have taken the trade surpluses that they've earned trading with the United States and they've invested in the U.S stock market and so that buying has also helped to bolster U.S stock market performance and so Americans have more wealth now on paper as a result of foreigners recycling their trade surpluses directly into the U.S Equity Market
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