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Consider the recent comments of Janet Yellen, Chairman of the Fed.  Speaking at the World Affairs Council in Philadelphia last Monday, Yellen reiterated her belief that economic growth is the source of rising prices.  Explaining her rationale for raising the interest rate at which banks lend to one another, “If incoming data are consistent with labor market conditions and inflation making progress toward our 2% objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate.” If Yellen is to be believed, economic growth fosters product and labor shortages that push up prices.  She’s funny that way in that if there’s a discredited idea in economics, it’s almost certain that Yellen believes it.

The short answer is that ‘production’ creates ‘demand’. True there will always remain a constant demand for food, water, shelter and clothing as these are fundamental human needs. After these basic needs are met however, all demand is ordinal, but dependent upon production.

As an example, I may demand a flying motorcycle, but until someone produces it, that demand remains unfilled. Only that which is produced can be demanded and exchanged.

As to rising prices, increased production, leading to increased demand, lowers prices. There are endless examples. Name any product that can be produced in replicate, look at what it cost when it was first produced, look at what it costs now.

Yellen and the Federal Reserve are the problem, not the cure.

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