argued that persistently falling interest rates cause an erosion of capital, unseen but nonetheless lethal. Producers are squeezed and try to survive by cutting prices. Lower prices add to pressures lowering interest rates, and a vicious spiral is set in motion. Thus money-creation by the Fed has a little-noticed deflationary side-effect to it, that may ultimately overwhelm the inflationary effect, in spite of predictions by the Quantity Theory of Money. Money out of the thin air? Detractors of our fiat money system (myself not included) are fond of saying that “the Fed is creating money out of the thin air. ” If that were true, then the Quantity Theory of Money (QTM) might be valid implying that the present runaway money-printing exercise would indeed lead to hyperinflation before long. How could anyone suggest that the denouement will be deflationary after all? I maintain that the Federal Reserve banks are not creating money out of the thin air. In fact, they must first post collateral with the Federal Reserv
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