But spending a ridiculous amount of money on something

Posted on: June 30, 2024 at 17:47:39 CT

would not normally be considered "inflationary" by any reasonable economic theory that I have seen, but if you would like to expound upon such a theory I would certainly listen.

In the thread that you had responded to earlier, and which you are continuing here, we were talking about the *causes* of inflation.

It was my assertion that increasing the money supply causes the "general inflation" (in prices of goods and services) as you called it. rask felt that it was 'greed' of business owners & you were defending him.

I think Brady's contract provides a good example. It is something we could look in microcosm that I think would show how the economics would play out on a larger level in the general economy.

The NFL has a salary cap of $255,400,000 per team, I believe. If Brady's team paid him an absurdly high salary, whether in your opinion, or my opinion or on some sort of objective basis, would that cause salaries of other players to go up around the league? Unless they all (or mostly) spent significantly less than their salary caps then I don't see how that could be the case. I believe most of them spend most or all of the money available to them for salaries.

That being the case, if they pay an exorbitant amount to one player, they have less to spend on the others. His high salary would in fact tend to reduce the salaries his team would be able to pay to the rest of the players on the team, not increase the overall salary level.

It would probably have zero effect on any of the other team's overall salary levels either. Perhaps it could cause a bidding war for quarterbacks, but if so, it would reduce the salaries of non-quarterbacks. The overall spending on salaries would remain constant for each of the teams in the NFL.

Shifting to the general economy. If there is a flat amount of $ in the US economy (for now we'll ignore the world economy), prices in a free market would tend towards an equilibrium based upon the preferences of consumers. If GM "got greedy" and raised their prices, consumers would tend to spend their money on Fords or Toyotas or Teslas or whatever they felt had better value. That puts pressure on "greed" in setting prices. Companies can't just willy nilly raise prices because they want to make more money. The free market will keep prices in check.

People generally have a set amount of dollars available to spend. They will purchase the products based upon their preferences and what is available in the market.

When the Fed starts pumping money into the economy, they generally do so by buying their own bonds. That bids down the interest rates. It gives extra profits to the banks & market makers (which may include many of the friends of the Fed decision makers), which bids down the prices/interest rates on the bonds. It gives the banks more money to loan out, and they do so by lowering interest rates, and it can eventually put pressure on them to lower their lending standards when they are so flush with cash that they don't have enough credit worthy (under more normal circumstances) potential borrowers.

More people borrow money at the artificially low interest rates and the money supply keeps increasing. The borrowers use that money to buy houses and cars, or perhaps build new manufacturing plants and so on and that extra money also causes buyers to bid up prices on consumer goods & everything else.

The lumber companies have a generally fixed supply of lumber at any given time, and other suppliers have similar inventories of supplies, whether that be bricks or steel or plumbing pipes or copper or whatever. With more new homes and other buildings being built the contractors start bidding against each other for the available supply. This is a time when companies can legitimately raise prices. They could sell all of their existing supplies at the original prices, but now demand is going up & they will run out before the demand does. In free markets they will tend to raise their prices. They are rationing the available supply based upon who is willing to pay the most. If they can raise prices a dollar per pound, or gallon or foot yard or whatever and still sell at the same clip they will do so.

They make more profits at the higher prices & often decide to raise output so that they can make even more profit (greedy bastards, eh?). They have to hire more people to do that and perhaps buy more trucks to haul stuff & maybe build more buildings to hold supplies, or even to add new locations to sell at these higher prices.

Of course there is also a generally fixed supply of workers at any given time. At first they will hire the most qualified unemployed people looking for jobs, but the supply of excess workers will eventually be absorbed & they have to start trying to train less qualified people or hire them away from other companies. To do that, they typically have to increase wages or offer better benefits or both.

That is where inflation comes from.