FIN/419 Week 2 Discussion question 1

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The information we have on money supply is alarming, especially when compared with the GDP and the Federal (and other) debt and Federal Deficit.  Several years ago, the head of the IMF called for the central banks of the world to re-capitalize European banks.  I believe that is what they have been doing.  When we go to calculate PV’s, we need to consider macroeconomic effects related to the money supply and the fact that our money in the future will buy less than it can today.  This is not easy to do these days.  The Federal Reserve has been monitizing our country’s debt and suppressing interest rates.  There has not been a similar corresponding increase in GDP either at home or abroad.  The Federal Government could have taxed every man, woman and child thousands to raise the money to cover the Federal Budget deficit, but that would make people mad.  Simply expanding the money supply usually escapes the concern of the masses, I suppose, but achieves the same result for both the government and the citizens.  Well, actually, taxing individuals would reduce the velocity of money initiated by them.  But, when the money supply is inflated, as the government begins to spend these new dollars, they realize the full current value.  As the money later trickles down to the consumer, its value has been fully diluted and prices have adjusted to compensate.  I would argue that government contractors will see less inflation than the consumer – something to think about!

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