Modern Monetary Theory: The little-known consequence of the massive coronavirus bills

noqreport.com ^ | 5/15/20 | JD Rucker

[Blood of Tyrants]

Yep, the worst things to come out of the early 1900s was the Federal Reserve (between 1789 and 1913, the inflation rate for the entire 124 years was NEGATIVE 20%. Since then it has the inflation rate has been nearly 2500%. The 16th Amendment, the income tax, which at one time was an incredible 92%. The 17th Amendment which took the states’ representation away and created what is essentially a super House. And the 18th Amendment which instituted Prohibition and by almost any measure, was a dismal failure.

[Alberta's Child]

I'll try to use a simple example to explain how this works ...

Suppose our entire economy consists of two people who run their own businesses and buy and sell only to each other. One of them is named KarlInOhio, and he's a grain farmer. The other is named Alberta's Child, and he's a baker.

Karl grows 100 pounds of grain every year and sells it all to AC for $1 per pound. AC takes that grain and bakes it into 100 loaves of bread that he sells to Karl for $1 per loaf. Karl generates $100 of revenue from his grain farm, AC generates $100 of revenue from his bakery operation, and they buy and sell everything they produce to each other. The entire annual GDP of this system is $200.

INFLATIONARY SCENARIO
Karl and AC complain that they want more than $100/year for their efforts. They convince their Congressman to appropriate $200 in government "stimulus" spending and give each of them another $100. The government prints $200 out of thin air and gives it to them. They both feel rich for a while, but it doesn't last long because very soon they're right back where they started. Karl grows 100 pounds of grain every year and sells it AC for $2 per pound, while AC bakes 100 pounds bread every year and sells them to Karl for the same $2 per pound. The entire annual GDP if this system is now $400, but it's all just the result of currency inflation and nothing has actually changed.

DEFLATIONARY SCENARIO
AC tells Karl that he has COVID-19 and will only be able to produce 50 pounds of bread this year. This means he only needs 50 pounds of grain. Karl says: "OK. I guess I will eat grubs and tree bark for the other half of my diet this year." So Karl grows 100 pounds of grain but only sells half of it to AC for $1/pound. The rest he burns to stay warm because he has nothing else to do with it and the demand has been cut in half. AC produces 50 pounds of bread and sells it to Karl for $1/pound. The entire GDP of this system is now only $100. This is what massive deflation looks like.

To ward off the effects of this deflation, the government steps in and authorizes $100 of "stimulus funding." It prints the $100 out of thin air and gives $50 to each of us.

The government tells AC: "You take this $50 and buy some of the grubs and tree bark Karl is gathering, even though you really don't need any of it."

The government tells Karl: "You take this $50 and pay AC to teach you to play the steel guitar, even though it doesn't help you farm any better."

The GDP in THIS scenario remains at $200. The whole purpose of the stimulus spending was to maintain the value of the currency and keep the system from collapsing with the underlying deflation.

The government stimulus you see in the U.S. today is related to the second scenario, not the first one.