Inflation and Extreme Wealth

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JoeNemeth's picture
JoeNemeth
Status: Member (Offline)
Joined: Oct 24 2008
Posts: 16
Inflation and Extreme Wealth

Here's a strange thought.

The general rule I've absorbed is that if you double the amount of money in circulation, you effectively halve its value. Seems to make sense. So given the amount of money the Fed has recently dumped into the marketplace, a McDonald's hamburger should cost, what, about a thousand dollars? Ten thousand? But it doesn't. In fact, compared to the amount of money created in the last few years, inflation has been barely noticeable. Food has only gone up at most a few hundred percent. So how does this work?

I have a theory that I'd like to air. Namely, that the ultra-wealthy are doing us all a favor by effectively sucking up all that excess money.

Consider. If you give me $100, it will buy me groceries for a week - gone instantly into circulation. If you give me $100,000 (thank you very much!), it's also gone in a New York minute, but the second $100,000 would last me for quite a while. If you give me $100M, it starts to get tricky - I don't actually have any idea how I'd spend that, so most of it would sit around in the bank for the rest of my life. If you give me $100B, I'm completely lost. In fact, there really isn't anything I could buy with $100B. So when the Fed dumps $500T on me, there is simply not enough stuff in the whole world into which I could transfer any reasonable fraction of that wealth. Absolutely the only thing left for me to buy with that kind of money - is more money.

What I think has happened, is that, yes, there has been a certain degree of general price inflation.

There's also been some grotesque price inflation of certain "luxury" items, like pricey real-estate or certain kinds of cars, collectibles, etc. So the wealthy can bid for and drop $100M on house that is probably - in real value - worth more like $1M or even less, but it's a completely segregated marketplace. I don't shop in those neighborhoods, and they don't compete with my dollar trying to buy housing in my neighborhood (except as investment property, but then they have to rent it out to people like me for reasonable rates, so they can't actually pay too much for those properties, or it becomes a "losing investment"). In essence, we are dealing with two isolated currencies in two isolated economies - development of economic ghettos.

But the real kicker is the ultra-wealthy. What happens after you've bought your nine homes, three yachts, four helicopters, two Lear jets, two country club memberships, stocked your wine-cellar, pre-paid your annual tourist trip into space, and polished all the gold fittings in your bathroom? All told, you still aren't anywhere near $100B, and now there is simply nothing left to buy. So you "invest" the money - meaning that you effectively buy more money, which you also can't spend, and it continues to grow exponentially. As the wealthy get so very much wealthier than the rest of us, it seems to me that they effectively take all that extra money out of circulation entirely. They hoard it because there isn't anything else they can do with it. And that would - I think - tend to mitigate the general inflation.

Thoughts?

Ray Hewitt's picture
Ray Hewitt
Status: Gold Member (Offline)
Joined: Apr 5 2008
Posts: 458
Re: Inflation and Extreme Wealth
So given the amount of money the Fed has recently dumped into the marketplace, a McDonald's hamburger should cost, what, about a thousand dollars? Ten thousand? But it doesn't. In fact, compared to the amount of money created in the last few years, inflation has been barely noticeable. Food has only gone up at most a few hundred percent. So how does this work?
The money is not evenly distributed. Much as been absorbed by housing, war and exported through the purchase of exports.
As the wealthy get so very much wealthier than the rest of us, it seems to me that they effectively take all that extra money out of circulation entirely. They hoard it because there isn't anything else they can do with it. And that would - I think - tend to mitigate the general inflation.

Unless they are burning money to heat their mansions, it is in still in circulation depending on where they save it. Saving does not take money out of circulation; it is transferred to the party that pays for it.

Certainly they are the biggest losers, dollar-wise. If gold goes high enough, I might consider moving into one of their ghettos. Cool

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