The PPP program generated asset price inflation?

“Where, Exactly, Did $800 Billion in PPP Money Go?” (Bloomberg):

Billions of dollars of federal funds may have been misappropriated as part of the government’s well-intentioned but loosely monitored effort to support entrepreneurs and their employees during the Covid-19 pandemic. Meanwhile, the Small Business Administration, which has supervised the massive rescue since last year, decided recently to speed up its completion by making it easier for borrowers to have their loans forgiven.

Analysts remain split on how best to assess the success of the PPP and the related Economic Injury Disaster Loan program. The Government Accountability Office puts the spending at $910 billion, of which $800 billion is PPP money. Any assessment, however, will rely on the release of more sweeping data about the push from the government and borrowers. It’s also becoming clearer that fraud may have been much more rampant than originally understood, although the likelihood of massive misappropriation because of lax supervision was obvious from the start. Any funds that wound up in the wrong pocket or were steered toward insiders also blunted the program’s effectiveness.

The question for today is not whether any of the $800 billion was obtained fraudulently (or whether forgiveness was obtained fraudulently), but what businesses actually did with the money. For example, my friends who own small-to-medium-sized companies enjoyed reasonably strong revenue in 2020 (a dip in the spring and then roaring back in the summer and fall), so the PPP money ended up being a an untaxed bonus of $millions that went straight into personal checking accounts. From there, what did or could they do with, e.g., $2-5 million? Mustafa Qadiri bought himself “a Ferrari, Bentley and Lamborghini” and got in trouble because he faked the number of employees that he had. But my friends were in a similar position, showered in cash that they had no use for in their respective businesses (which were continuing to show a profit).

Let’s assume that half the companies that got PPP didn’t need it. That’s $400 billion in cash that business owners needed to invest in stocks or real estate. This is only about 1 percent of the total value of the U.S. stock market, but it could still be significant if we believe the Wall Street Journal. “What Determines Stock-Market Prices? Here’s a New Theory” (11/6/2021):

A new study shows how much the flows of money into and out of the stock market affect stock prices—perhaps more than many investors realize.

Specifically, a dollar of cash from outside the stock market that is invested in equities will cause the combined market cap of all stocks to rise by about $5, while a dollar withdrawn from the market will have the opposite “multiplier effect,” the study says.

The reigning academic theory of the market up until now, in contrast, has insisted that investors are extremely sensitive to price, very willing to sell when prices go up. As a result, flows into the market that have no relevance to a company’s fundamentals should play no role. That is why academic orthodoxy up until now has been that the flow-based multiplier must be zero.

The new study that finds to the contrary, titled “In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis,” was written by Xavier Gabaix, a professor of economics and finance at Harvard University, and Ralph Koijen, a finance professor at the University of Chicago’s Booth School of Business.

Another reason is investor psychology: We become more bullish as prices rise—not less. An illustration is how much stock market timers’ recommended equity-exposure levels have risen since the March 2020 bottom. According to my tracking of nearly 100 such timers, they on average were completely out of the market at that bottom, when the Dow Jones Industrial Average was below 19000. Today, with the DJIA nearly double where it stood then, the average exposure level is 63%. If these timers were more price-sensitive, you would expect their equity-exposure levels today to be a lot less.

It could the same phenomenon in real estate. In a country where it is ever-more-challenging to build anything (but we’ll bring in 59 million more migrants and hope to find somewhere for them to live!), extra money in bank accounts will generate insane bidding wars among those who were blessed by the Great Covidcratic Wealth Reallocation of 2020-2022.

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Inflation rages because the apparatchiks never worked in a factory?

A friend owns a company that makes equipment for factories. His theory is that the central planners who’ve been printing money overestimated the elasticity of supply and therefore created much more inflation than they expected. In his experience, the number of Americans willing, interested, and capable of building anything in a factory is essentially fixed. Once existing factories and teams maxed out, increased government spending just created inflation rather than more production.

For the apparatchiks who set up the money-printing presses, factories are abstract concepts, never experienced in person. They come up with theories about why certain complex items aren’t available, e.g., automobiles or GPUs, but don’t grapple with the reality than even the simplest-to-build items are back-ordered by months or years. I just checked at, for example, and none of the things that we wanted to buy in August 2021, e.g., dining chairs, are back in stock:

(I check every month or so and the situation has never improved. We’ve learned to live with what we have!)

Could the inelastic nature of worldwide manufacturing have been expected? I think so! Look at the Great Toiler Paper Famine of spring 2020. A tiny increase in demand led to empty supermarket shelves, not increased production.

Readers: What do you think of this theory? The Modern Monetary Theory that is the de facto mainstream economic philosophy in the U.S. assumes that inflation occurs as soon as supply runs out, but doesn’t predict when the supply wall is hit.


  • Netflix: American Factory (in which a Chinese auto glass manufacturer tries to get workers in Dayton, Ohio to make high quality glass while Senator Sherrod Brown and other politicians try to get the workers to unionize)
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Inflation as experienced by a police officer

At a COVID-safe Super Bowl party, one of the guests was a police officer who lives in our building. She was chatting with a guy who works for a small video production company. He talked about the challenge of paying rent that had gone up more than 10 percent, health insurance that was going up almost as fast, and similar inflation woes. She expressed amazement that an employer wouldn’t provide health insurance. “The company keeps the headcount below 50 so that the Obamacare rules don’t apply,” said the pinched private sector worker.

The police officer described receiving automatic pay raises in lockstep with official government inflation numbers, which she acknowledged did not keep up with the rising cost of housing here in South Florida. Although only in her 20s, she was already looking forward to retirement. “It’s based on your highest three years of earnings,” she said. “So if you work a lot of overtime near the end of your career you can get a pension that is higher than your full-time salary.”

We asked what the real world speed limit was. “I don’t pull anyone over for speeding,” she replied. “If they’re speeding, that’s a risk that they’re taking for themselves. The State Troopers, however, will even give me tickets.”

Was it worth getting a license plate celebrating law enforcement or applying stickers evidencing a donation to a police-oriented cause? “Those are the people I worry about the most,” she said, “because I know they’ll have a gun in the car.”

What about our minivan, with its “Support Education” specialty tag? (example below)

She said “Any officer who pulls over a minivan needs to reevaluate his or her priorities in life. I won’t pull over a minivan.”

Our Jupiter, Florida police department sends in the SWAT team any time there is a search warrant to be executed. “Jupiter doesn’t have a lot going on,” she responded. “I can do that too if I want. If I pull someone over and there is a warrant outstanding, I can turn it over to SWAT.”

What about enforcement of coronapanic orders? (she worked for a police department down towards Miami, where muscular governmental intervention in the life of a respiratory virus is popular) “I won’t ticket people for not wearing a mask,” she said.

We learned that one shouldn’t be too upset when the police come to investigate a neighbor’s noise complaint. “It won’t hold up in court if there isn’t a calibrated noise measurement and we don’t have any meters,” she said.

(Why was the party “COVID-safe”? Everyone in the room was following the same mask protocols that the spectators in the stadium that we saw on TV were following and we know that California Follows the Science.)

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CVS marked down COVID-19 tests before Joe Biden’s arrived in the mail

The 6-year-old and I found COVID-19 tests on sale today at CVS in Jupiter, Florida:

I placed my order for taxpayer-funded tests (“free”) on January 19, the advertised first day in “The Biden Administration to Begin Distributing At-Home, Rapid COVID-⁠19 Tests to Americans for Free ( and haven’t gotten anything yet except an email from USPS promising an update “once your package ships.”

In other words, relief from the central planners will arrive some weeks after CVS was forced to mark COVID-19 tests down due to oversupply.

I remarked on the low price and ample quantity available, saying “Those would have been very valuable a month ago.” The 6-year-old immediately responded, “let’s buy some now and keep them at home and then sell them for $20.99 during the next wave.”

I’m not going to leave him alone with any Dr. Seuss books (re-sold for up to $1,700 on Amazon before being banned there)!

Readers: Did your tests from the central planners arrive? If so, when? It was supposed to be “seven to 12 days” from January 19.

Speaking of COVID-19, let me take this opportunity to give a shout-out to selfless front-line workers, such as the physician (see the license plate) who parked this Ferrari on the street near the above-mentioned CVS:

Who knows Ferraris well enough to say what model this is and estimate the value? My guess is a Portofino retractable hard top (worth about 250,000 in 2022 mini-dollars).


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Inflation Chronicles: meatballs and spec houses

“Annual American inflation hit 7.5%: A near 40-year high” (CNN, today):

A key measure of inflation climbed to a near-40-year high last month. Economists are hopeful that America will reach the peak of the pandemic-era price increases in the early months of 2021. Here’s to hoping.

The consumer price index rose 7.5% in the 12 months ending January, not adjusted for seasonal swings, the Bureau of Labor Statistics said Thursday. It was the steepest annual price increase since February 1982 and worse than economists had forecast.

(Note that these are “pandemic-era” increases, not “Biden-era”.)

Which economists are “hopeful”? The article itself cites only an economist who suggests that the price increases will be persistent.

“There will be plenty of persistence from soaring house prices pushing shelter costs this year,” said Sal Guatieri, senior economist at BMO, in a note to clients.

How does it feel on the ground? (“on the swamp”?) Across from our beloved Abacoa neighborhood is Alton, a newer development. The Italian restaurant inside Alton is Lynora’s and, through 2021, they were famous for $2 meatballs on Mondays (example). For 2022, the meatballs are $3 each (an annual inflation rate of 50%).

What about the new houses in Alton? You used to buy one pre-construction or at least pre-completion, thus enabling the selection of colors, styles, finishes, and options. The result would be paying a June 2021 price and moving into a December 2021 house. Inflation is now so high that this approach to business has become untenable. Starting in 2022, the developer will no longer sell any house until it is complete and therefore it is no longer possible for a buyer to customize anything.

What does a house with in Alton look like? Here’s one for $3 million (5,000 square feet, helpful alligator ramp from the “lake”):

Or you could live in a townhouse for $950,000 (2,252 sq. ft.):

Despite the stratospheric-by-2020-standards prices, this neighborhood is actually inferior to Abacoa in many ways. People don’t like the public schools as much (though both neighborhoods are served by the same Palm Beach County system). There is much less green space in Alton. There are fewer trees and they’re scrawny so there is precious little shade. There is so little space between houses that your single family home’s living room probably ends in the neighbor’s bathroom. Why are people willing to pay so much? There is a significant premium for new construction in Florida, where people believe sic transit gloria mundi when it comes to developer-built housing exposed to sun and humidity. (As Dan Quayle is famous for pointing out, Latin is more commonly spoken here due to the proximity to Latin America.)

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More bad news for Americans in the slavery zone ($100,000 per year)

The U.S. is a great place to be on welfare. Except for France, we spend the largest percentage of our GDP on government handouts such as free housing, health care, food, and smartphone (Washington Post). Marijuana is legal in a lot of states (and “essential” so it will be available through any COVID-19 shutdowns), booze is cheap, and Medicaid will buy you a suitcase full of opioids.

The U.S. is also a great place to be rich. There is no limit to corporate executive pay. After the shareholders have been thoroughly mined, there are plenty of swank neighborhoods in which to hang out with other rich people. At least until 2020, there was a huge supply of low-wage service workers to meet the needs and wants of those in the rich enclaves. Unlike Europe, we have no massive value-added tax to discourage consumption. (Depending on the state, rich people are much more exposed to family court predators than in Europe; see Real World Divorce.)

There is a slavery zone in the middle, though, where an American earns too much to get subsidized housing, health care, food, etc., but not enough to have a spending power or material standard of living substantially higher than what someone on welfare enjoys (quantified by state). He/she/ze/they will pay a crushing array of taxes as well in order to support the comparable material lifestyles of those who don’t work at all.

American slaves seem to be prevented by economics from reproducing. From $50,000 per year to nearly $200,000 per year, fertility is lower than for those on welfare and for the elites. A chart from 2019:

The Wall Street Journal (2/7/2022) says the trend is toward additional oppression of these slaves. “In Covid-19 Housing Market, the Middle Class Is Getting Priced Out”:

At the end of last year, there were about 411,000 fewer homes on the market that were considered affordable for households earning between $75,000 and $100,000 than before the pandemic, the study found. At the end of 2019, there was one available listing that was affordable for every 24 households in this income bracket. By December 2021, the figure was one listing for every 65 households.

For households earning between $75,000 and $100,000, five of the top six metro areas with the fewest affordable homes for sale per household were in California, NAR found, led by the San Jose metro area. The state’s shortage of affordable housing helps explain why many people left California’s coastal cities during the pandemic and moved inland.

Is it safe to say that the future of the American middle-class slave is apartment living and a one-child max? The population keeps growing while land and roads are more or less fixed. Construction costs go up much faster than wages. A median earner in China can’t afford a single family home. As the U.S. approaches Chinese levels of population, why would we expect someone near the median here to own a single family home?


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How an asset bubble that inflates and deflates makes a lot of people worse off

One might think that an asset bubble that inflates and deflates doesn’t hurt that many people. After all, if you just stay in your house, what difference does it make if the value goes up to 3X and then comes back down to 1.2X?

Jeremy Grantham, the G in the asset management firm GMO, points out that people caught up in bubble fever adjust their consumption (i.e., spend like drug dealers). From his January 20 newsletter (a friend who has managed $billions sent it to me):

All 2-sigma equity bubbles in developed countries have broken back to trend. But before they did, a handful went on to become superbubbles of 3-sigma or greater: in the U.S. in 1929 and 2000 and in Japan in 1989. There were also superbubbles in housing in the U.S. in 2006 and Japan in 1989. All five of these superbubbles corrected all the way back to trend with much greater and longer pain than average.

Today in the U.S. we are in the fourth superbubble of the last hundred years.

One of the main reasons I deplore superbubbles – and resent the Fed and other financial authorities for allowing and facilitating them – is the underrecognized damage that bubbles cause as they deflate and mark down our wealth. As bubbles form, they give us a ludicrously overstated view of our real wealth, which encourages us to spend accordingly. Then, as bubbles break, they crush most of those dreams and accelerate the negative economic forces on the way down. To allow bubbles, let alone help them along, is simply bad economic policy.

What nobody seems to discuss is that higher-priced assets are simply worse than lower-priced ones. When farms or commercial forests, for example, double in price so that yields fall from 6% to 3% (as they actually have) you feel richer. But your wealth compounds much more slowly at bubble pricing, and your income also falls behind. Some deal! And if you’re young, waiting to buy your first house or your first portfolio, it is too expensive to get even started. You can only envy your parents and feel badly treated, which you have been.

If your house goes from being worth $800,000 to $1.6 million, as the houses in our Florida neighborhood have done within the past two years, Grantham predicts that you’ll sign up for that lavish vacation, buy the fancy new car, splurge on clothing and jewelry (see “Cartier’s Dazzling Festive Season Bodes Well for Luxury Stocks” (WSJ): “Overall, U.S. jewelry sales increased 32% year-over-year from Nov. 1 to Dec. 24”), pay $1.2 million for a piston-powered unpressurized airplane, etc. We see this with governments as well. States that are raking it in from temporarily turbocharged capital gains taxes build new spending programs that will need to be funded every year, even if capital gains tax revenues collapse due to asset values stagnating (but maybe inflation can help, since capital gains tax calculations don’t adjust for inflation and, therefore, even assets that actually lost value will result in taxes being owed on a nominal profit).

Where does Grantham, an elder statements of the equity markets, think we’ll end up?

The key here is that two things are true: 1) the higher you go, the lower the expected future return; you can gorge on your cake now or enjoy it piece by piece into the distant future, but you can’t do both; and 2) the higher you go, the longer and greater the pain you will have to endure to get back to trend – in the current case to a trend value of about 2500 on the S&P 500, adjusted for the passage of time, from whatever high point the market might reach (currently at nearly 4700).

In other words, the S&P crashes to 2,500 or, assuming sufficiently clever manipulation of all the control wheels by wizards in Washington, D.C., stays more or less where it currently is, adjusted for inflation, for a decade or so.

(Maybe “spend like drug dealers” above isn’t the best expression for today? How about “spend like crypto early-adopters”?)


  • Grantham warned us of a bubble in January 2021 (and if you’d followed his advice by going short or moving to inflation-savaged cash you’d be pretty miffed right now!): “We at GMO got entirely out of Japan in 1987, when it was over 40% of the EAFE benchmark and selling at over 40x earnings, against a previous all-time high of 25x. It seemed prudent to exit at the time, but for three years we underperformed painfully as the Japanese market went to 65x earnings on its way to becoming over 60% of the benchmark! But we also stayed completely out for three years after the top and ultimately made good money on the round trip. Similarly, in late 1997, as the S&P 500 passed its previous 1929 peak of 21x earnings, we rapidly sold down our discretionary U.S. equity positions then watched in horror as the market went to 35x on rising earnings. We lost half our Asset Allocation book of business but in the ensuing decline we much more than made up our losses.” The Jan 2021 piece includes the figure below.
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At-home test kits are back in stock; triumph of central planning?

As of last night, CVS in the Palm Beach area has at-home test kits back in stock.

Do we call this a failure of central planning? The site to order “free” (i.e., paid for by us via taxes) kits went live only on January 19 delivery time was supposed to be “within seven to 12 days” (USA Today). In other words, the central planners’ fix for the shortage will not ramp up until after the shortage is over.

Or do we call this an example of the success of central planning? Secure in the knowledge that Joe Biden is sending them four kits per household, Americans have ceased their panic buying of test kits at retail.

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How’s transitory inflation in your area?

From the in-house economics Nobel-winner at the New York Times (December 2021):

Even once the inflation numbers shot up, many economists — myself included — argued that the surge was likely to prove transitory. But at the very least it’s now clear that “transitory” inflation will last longer than most of us on that team expected.

In other words, all inflation is transitory, but some transitory inflation is more transitory than others.

(Dr. Jill Biden’s colleague Professor Dr. Krugman, M.D., Ph.D. previously successfully predicted the stock market crash that lasted throughout the dark Donald Trump years.)

Readers: What are you seeing for the stuff that you buy? If you’re in business, what are customers saying when you raise prices to them? Is it better to multiply by 1.4X once or 1.1X every few months until your revenue recovers its former purchasing power?

We took our Odyssey in for an oil change. The Honda dealer’s showroom contained only used cars, as did the lot. A new Accord or Odyssey was available for $3000 over sticker and a 1-2-month wait. “Some dealers are charging more,” the salesman said. This would be about $7,000 more than we paid for our in-stock Odyssey a year ago (i.e., roughly comparable to the 20% annual inflation in housing, though it would have been much higher for similar delivery time (buy out someone else’s order for $5,000 extra?)).

Honda plainly isn’t charging a market-clearing price for wiper blades. The dealer had just one of the two front blades in stock. Regarding the passenger-side blade, the advisor said “They’ve been on backorder.”

Our Cirrus SR20 needs its “reefing line cutters” replaced every 6 years. These are required every time that the pilot, or a nervous passenger, elects to land via parachute. Owners have mentioned long delays in getting parachute components for the Cirrus so I emailed our mechanic recently, three months before we actually need the part. Here was his response:

I will order you a set of line cutters as this has been on back order … be advised aircraft parts are increasing in price almost every day!

In 2021, Robinson Helicopter Company, founded in 1973, imposed its first-ever mid-year price increase. Order your aviation stuff now (13 percent price increase from Lycoming) describes a first-in-many-decades mid-year price increase from Lycoming.

Aviation costs, even for parts, seem to go up more like U.S. labor costs than like the costs of stuff that you can buy in Walmart. Aircraft parts, due to certification requirements, can’t be made by multiple competing Chinese and Mexican factories. The volume is low so it isn’t worth automating. Even if you’re just buying a bolt, which for a jet can cost $thousands, you’re essentially buying labor and health insurance.

Here is a line cutter in action. I think you’re seeing a $1,000 part (there are two for redundancy and both must be replaced every six years; then there is the $15,000 currently-unobtainable re-packed parachute every 10 years):

The used aircraft market is still booming, with airplanes worth 2X what they went for in 2019, but I wonder if a few years of transitory inflation will change that. Not everyone’s income goes up with inflation. Someone who bought a plane budgeting $X/year for hangar, maintenance, and insurance will now be paying $2X per year. At some point, won’t that person begin to ask “Why do I need this airplane? I can do most meetings via Zoom. I can move to Florida and have popular vacation destinations within a short drive. President Harris can’t keep up the mask requirements on commercial airlines forever.”


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The Federal Reserve Bank president who said not to print money

Happy Lucky 13 day! Given the recent headlines, e.g., “Inflation rises 7% over the past year, highest since 1982” (CNBC), let’s look at “The Fed’s Doomsday Prophet Has a Dire Warning About Where We’re Headed” (Politico).

In 2010, Hoenig was president of the Federal Reserve regional bank in Kansas City. As part of his job, Hoenig had a seat on the Fed’s most powerful policy committee, and that’s where he lodged one of the longest-running string of “no” votes in the bank’s history.

Between 2008 and 2014, the Federal Reserve printed more than $3.5 trillion in new bills. To put that in perspective, it’s roughly triple the amount of money that the Fed created in its first 95 years of existence. Three centuries’ worth of growth in the money supply was crammed into a few short years. The money poured through the veins of the financial system and stoked demand for assets like stocks, corporate debt and commercial real estate bonds, driving up prices across markets. Hoenig was the one Fed leader who voted consistently against this course of action, starting in 2010. In doing so, he pitted himself against the Fed’s powerful chair at the time, Ben Bernanke, who was widely regarded as a hero for the ambitious rescue plans he designed and oversaw.

Hoenig lost his fight. Throughout 2010, the FOMC votes were routinely 11 against one, with Hoenig being the one. He retired from the Fed in late 2011, and after that, a reputation hardened around Hoenig as the man who got it wrong. He is remembered as something like a cranky Old Testament prophet who warned incessantly, and incorrectly, about one thing: the threat of coming inflation.

So… he predicted inflation but was off by about 12 years as to when it would arrive? How is that different or better than predicting a big stock market crash at some point in the future?

But this version of history isn’t true. While Hoenig was concerned about inflation, that isn’t what solely what drove him to lodge his string of dissents. The historical record shows that Hoenig was worried primarily that the Fed was taking a risky path that would deepen income inequality, stoke dangerous asset bubbles and enrich the biggest banks over everyone else. He also warned that it would suck the Fed into a money-printing quagmire that the central bank would not be able to escape without destabilizing the entire financial system.

The Fed is now in a vise. Inflation is rising faster than the Fed believed it would even a few months ago, with higher prices for gas, goods and automobiles being fueled by the Fed’s unprecedented money printing programs. This comes after years of the Fed steadily pumping up the price of assets like stocks and bonds through its zero-percent interest rates and quantitative easing during and after Hoenig’s time on the FOMC. To respond to rising inflation, the Fed has signaled that it will start hiking interest rates next year. But if that happens, there is every reason to expect that it will cause stock and bond markets to fall, perhaps precipitously, or even cause a recession.

How does centrally-planned inflation work?

When the Fed kept interest rates low during the 1970s, it encouraged farmers around Kansas City to take on more cheap debt and buy more land. As cheap loans boosted demand for land, it pushed up land prices — something that might be expected to cool off demand.

But the logic of asset bubbles has the opposite effect. Rising land prices actually enticed more people to borrow money and buy yet more land because the borrowers expected the land value to only increase, producing a handsome payoff down the road. Higher prices led to more borrowing, which led to higher prices and more borrowing still. The wheel continued to spin as long as debt was cheap compared to the expected payoff of rising asset prices.

The bankers’ logic followed a similar path. The bankers saw farmland as collateral on the loans, and they believed the collateral would only rise in value. This gave bankers the confidence to keep extending loans because they believed the farmers would be able to repay them as land prices increased. This is how asset bubbles escalate in a loop that intensifies with each rotation, with the reality of today’s higher asset prices driving the value of tomorrow’s asset prices ever higher, increasing the momentum even further.

And the central planners, back in the 1980s messed up the flip side of this too, causing bank failures when farmland prices fell only 27 percent.

I recommend the article for its historical perspective. Don’t complain if you don’t find a solution to our current situation (high inflation; mediocre economic growth once adjusted for population growth). Part of this banker’s point was that there is no good way to stop printing money.

What did cars look like the last time inflation was this high? Here’s an example from a classic car gathering in our neighborhood:

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