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Is the Biden Plan Big Enough? Why is Wall St. OK with a Higher Deficit? – Bob Pollin

Working families are suffering, is the Biden plan big enough? Why doesn’t Wall St. fear inflation or a drop in the US dollar? Bob Pollin on theAnalysis.news with Paul Jay.

Transcript edited for clarity

Paul Jay

Hi, I’m Paul Jay. Welcome to theAnalysis.news podcast, and please don’t forget there’s a donate button at the top of the webpage.

Over the years, Republican cries about the evils of big deficits have been more rhetorical than real. That is, as long as the deficit came as a result of tax cuts and not social programs that benefited working people. Biden takes the reins of the federal government at a time when most of Wall Street has embraced the need for more stimulus and shows little to no concern about the size of the deficit. So why is Wall Street so on board with more stimulus and given the change of mood of the financial sector and the historically low inflation rates, is the plan announced by Biden going far enough?

And once the economy is recovering, will Biden succumb to pressure from austerity hawks and move towards a more balanced budget? And how will Biden achieve his goal of making the U.S. power grid carbon neutral by 2035? Is he planning to phase out fossil fuel or is he depending on carbon capture, which is still unproven technology? We’re going to talk about all of this with our guest who’s now joining us, Bob Pollin. He’s the co-founder of PERI the Political Economy Research Institute in Amherst, Massachusetts, and co-author of a book with Noam Chomsky titled Climate Crisis and the Global Green New Deal: the Political Economy of Saving the Planet. Thanks for joining us, Bob.

Bob Pollin

Thanks very much for having me, Paul.

Paul Jay

So let’s start with this change of mood. You know, it wasn’t that long ago when the predominant majority voices on Wall Street, certainly expressed through the leadership of the Republican Party and many of the Democrats, was all about austerity. And even at times, if they accepted a certain amount of stimulus when there was a recession, but it didn’t take long before the austerity hawks were back yelling again. But there seems to be a real change of mind about this on Wall Street. What is that about?

Bob Pollin

I would say in the first instance, the people on Wall Street recognize the magnitude of the crisis. Which is historic and they don’t want to go down. Now, what’s happened over the last nine months since the covid pandemic started? The US economy has experienced this massive recession. If you look at over the last nine months, 45 percent of the workforce, 78 million people have filed for unemployment insurance.

If you look at basic indicators, which I was just looking at, almost 20 percent of households with children in the last week have faced food insecurity, don’t have enough to eat. Another 20 percent say they can’t afford their rent. That’s from the real side of the economy. Now, on the financial side of the economy, the Dow Jones Industrial Average from March until today is up almost 70 percent. This is again, this is truly unprecedented that the real economy is experiencing severe suffering, but Wall Street is doing great.

And why is Wall Street doing great? Well, because in March, we passed the initial stimulus program, the Cares Act, which was about 10 percent of GDP deficit expansion. On top of that, the Federal Reserve began buying up bonds from Wall Street to keep them afloat, to get money in their pockets. To date, they’ve bought up about three trillion in bonds. So that’s 14 percent of GDP pumped into Wall Street directly.

So what are they you know? They’re happy about it. They’re doing very well. So the deficit is really not the big problem for them. The problem for them is to keep the stock prices going up. And that’s happened under this extraordinary expansionary policy that’s taken place in the previous nine months.

Paul Jay

The increase in asset prices, the stock market had a lot to do with the Fed directly buying debt, and I believe they even bought certain stocks, they bought into index, they loaned money to corporations.

The defense of the assets seems to be as much or even more of the previous stimulus package than actually went into the pockets of working people. Now, this stimulus, if I’m correct, seems to be more focused on getting money into people to increase demand in the economy. And Wall Street seems to be quite happy with that as well now.

Bob Pollin

Well, OK, so we just also passed in December just a month ago, we passed the second stimulus program that was 900 billion, which was one-third of what the House Democrats passed in May, the Heroes Act that never got enacted under Trump.

So the proposal under Biden that he put out just a couple of days ago pretty much coincides with the magnitude, the size of the Heroes Act. If you add up what passed in December and then what Biden is proposing, another 1.9 trillion, which would give would give people another fourteen hundred dollar check on top of the six hundred that passed in December. It would give unemployed workers another four hundred dollars a week on top of the three hundred that got passed in December.

So the Biden proposal brings us back to, more or less, what passed in the House in May. And it has these critical features. It does include spending to support state and local governments that are looking at half a trillion dollars of deficits in the next several months if they don’t get some kind of support, it gives a few hundred billion for covid relief, public health support, and that’s critical, and the other big thing is that it extends the child care tax credit.

So for working families with children, it’s giving them support. So on all of those. Yeah, it’s not focused on Wall Street this time. There isn’t anything in it for example, in terms of support for businesses.

Paul Jay

Now, is the Fed continuing its support for the stock market? These are quite separate things then.

Bob Pollin

So the Fed, the Fed bond-buying. You never know because the Fed, the Fed bond-buying, they just do it. They’re not under public scrutiny. Almost nobody even knows what they’re doing or understands what they’re doing. But, you know, having just checked it. So the Fed has bought about three trillion in nine months which was a seventy-eight percent increase in nine months relative to the floor that they were.

Paul Jay

They bought three trillion of what?

Bob Pollin

Three trillion of corporate bonds, for example, you said indexed bonds, so basically just Wall Street paper. They bought that. They were empowered under the March stimulus to lend, directly lend. And that lending program actually really never got that big. They never even reached the point at which they were legally permitted to go. But that was relatively small. So there’s been press about the fact why didn’t the Fed meet its lending levels to support business, when in fact what the Fed really did was buy three trillion dollars.

That’s 14 percent of GDP, 14 percent of GDP they bought just in the last nine months. Again, this is absolutely without historic precedent.

Paul Jay

A significant amount, if I’m understanding all this correctly, of the government debt that’s increasing with these stimulus programs. Are they not borrowing a large chunk of it actually from the Fed?

Bob Pollin

Well, that’s the other thing. So the Fed always, their day to day operation is buying and selling government bonds, that’s what they do. So, yes, I mean, the Fed could buy all of the government bonds and therefore we have a deficit increase.

But the deficit just goes away because the Fed buys the bonds the Fed owns the bonds, and nobody has to pay anybody. That’s printing money effectively. And the Fed does that all the time. That’s what they do. It’s just the level at which they do it. So, yeah, we don’t really have to worry too much about the deficit blowing up. I would say we have to worry a little bit. Not now, maybe in three years we do, but not a lot, especially because the interest rate at which the U.S. government is borrowing is a half of one percent.

So, you can borrow a trillion dollars, but if you don’t have to pay any interest, you just keep rolling over the debt and it doesn’t affect your budget at all.

Paul Jay

And if you’re borrowing it and paying interest to the Fed in large part, then you’re just borrowing it from yourself. Like it’s all a bunch of digit moving back and forth on computers. So in some ways, it comes down to a confidence game in a sense that you can push this as far as global capital maintains confidence in the American dollar, and I know there’s a lot of talk about, you know, the American dollar, maybe people are going to lose confidence in it.

But what the hell is the alternative? The whole global capitalist system is based on this. If people start losing confidence in the American dollar, it throws everything up in the air.

Bob Pollin

Right. So the U.S. is unique, has this unique situation. Just like what happened in the last crisis with the financial crisis 2009. And the borrowing then was massive, historically high. And at that point, unlike now, there were these choruses of the big-time economists, orthodox economists, the deficit hawks, as you referred to, saying this is going to be a disaster. People lose confidence in the dollar. And actually what really happened was just the opposite because you’re in a crisis.

Well, OK, we don’t like the US dollar, but then what do we like? There really wasn’t an alternative then. And so what actually happened was that the buying of the government bonds increased the [price of] U.S. government bonds. That was the safest asset on the global financial market. And it remains the safest asset on the global financial market because the dollar is the global currency. So that is this advantage we call seigniorage that the US is able to work with, that no other country can enjoy, even in Europe, even the European Central Bank.

Paul Jay

Yeah, I remember in 07, 08 the number of predictions of the decline and collapse of the American dollar and buy gold. And I remember one prediction even had the United States breaking up and having separate currencies in different parts of the country. And what actually happened, the whole world bought US dollars.

Bob Pollin

Yeah. And so that’s where we are now. Yeah. I mean, you know, it wasn’t just like crazy people saying, you know, let’s break up the U.S. It was the leading Orthodox macroeconomists were saying, yeah, this is going to be a disaster. This is 2009. What’s going to happen is there’s going to be massive inflation, massive increases in interest rates, and then the US government is going to face bankruptcy. This is the famous Reinhart and Rogoff paper saying, you know, that it would lead to the collapse of economic growth.

None of those things happened. And that has in turn led to kind of a much more relaxed attitude towards deficits in general at the moment. On top of the fact that we have such a huge crisis, it’s a good thing the government is spending because even at the level of suffering people are experiencing, not Wall Street, everybody else, it would be much worse if we weren’t doing this deficit spending.

Paul Jay

So then I’m left with the question, if you have an out of control pandemic and for at least four or five, six months, maybe more, who knows when the vaccine actually starts to slow this thing down. And it seems to me just listening to everything, that there’s far more capacity in terms of the deficit. Why isn’t there a lockdown, a national lockdown, and pay everybody to stay home?

 The form where you give the money to the businesses to pay all their workers to stay home at the same rate they were being paid before? People that don’t have jobs get actual living wages to stay home and you lock the place down until the pandemic is over rather than tens of thousands or hundreds of thousands more deaths. So in that context, it seems to me the Biden plan, which looks good compared to what the Republicans were pushing, you know, just a few weeks ago when they controlled the Senate. It seems way conservative for what’s actually needed.

Bob Pollin

Yeah, I mean, I think that the fourteen hundred dollars, for example, that’s in the Biden plan, which will tack on to the six hundred dollars that’s already passed. So you get two thousand dollars. OK, that’ll cover two months rent maybe. But then it’s over. What we should have is, you know, whatever, two thousand dollars a month until this is done. The unemployment insurance, I mean, obviously, a lot of people do still need to work. People working in grocery stores and supermarkets, people work in hospitals.

And then, you know, over half of the people in the upper-income brackets are working online pretty much. OK, so that can continue, but everyone else, yeah. I mean, the four hundred dollars supplement that Biden has is worthwhile. It’ll help. But, it’s not going to last forever. We’ve got to keep it going until the pandemic is done. And the six hundred dollars total that was in the previous stimulus was giving people their full income people up to, say, thirty-five thousand dollars a year, was giving them their full income while they were unemployed. So that’s a reasonable level.

Paul Jay

And it’s not just smoke and mirrors that, you know, the Fed owns some of the debt and, you know, people just have no choice but to believe in the US dollar and so on. There’s real wealth in the United States. To back all this up. I saw a study, by I think it was Brookings Institute which did an analysis of how much wealth assets are there in private hands after debt. Actual assets after death, and it was 98 trillion dollars.

 That’s a ridiculous amount of money in private hands that at least in theory, you could tax if you had to.

Bob Pollin

 The Biden program, which, you know, I think it should pass. I hope it passes and it’ll get us through another few months. It doesn’t say anything about spending for climate change or anything for infrastructure at all. It doesn’t say anything about expanding public health beyond a few months at all.

So all of these things have to also be tacked on. And Biden has talked about another program and that one is supposedly coming next. Now, how do we pay for that one? Well, I think we have to start taxing high-income people. A wealth tax is a very simple way to do it. We can also tax Wall Street transactions, which is something that has been proposed by Bernie Sanders. You know, six, seven years ago, there’s been a bill that was introduced in the House eight years ago.

I myself helped draft it. It was by then Congressman Keith Ellison and Bernie picked it up. That would raise another three hundred billion a year. So, yeah, those are ways to advance an egalitarian and green agenda. And it doesn’t all have to be on deficits.  Wealthy people should just pay more taxes. I mean, look, the average return on a high-income asset is about seven percent. So if you had a two percent wealth tax, that would pay for the whole program a serious green agenda, for example.

OK, then the wealthy people have a return of five percent, they’re already really rich and they’re going to get five percent richer a year as opposed to seven percent richer a year. That’s what we’re talking about here.

Paul Jay

And in fact, that seven percent is an average, but the top one-half percentile is doing way, way more.

Bob Pollin

Yeah. Elon Musk,  he went from whatever, three billion to one hundred and fifty billion in the last year. So he’s certainly benefited from all the talk about a green economy.

Paul Jay

I think there’s another thing that doesn’t get enough attention is the pushback from Republicans and one of the people who has been most outspoken about this is Lindsey Graham. Pushback on a program that pays people subsidies while they’re at home. His big objection was that people were getting paid more than they were earning when they went to work and that the lack of that discipline of the working class, which means the desperation of the working class to work for such crappy wages that if you stay home and you can get your six hundred bucks a week and you go to work and you’re only making four hundred, why are you ever going to go back and work for four hundred?

Well, that’s the point. Why the hell should you be working for 400? But that whole logic is infected or has pressured, I think, on why they want to lower these weekly subsidy amounts, because they’re buying into the logic that you can’t let the sections of the working class willing to work for poverty wages get a taste of what it’s like not to have poverty wages.

Bob Pollin

 That’s certainly been an argument forever, as long as there’s been any ideas about any kind of social welfare programs. The argument against that is, well, then people won’t have any incentive to show up at work. And, there’s a massive literature focused mainly around Europe where they have more generous welfare states to say, well, this is the cause of long term unemployment because we’re giving people too much money.

Their unemployment benefits, they’re too  generous. And so people say, why should I bother to go back to work? Well, there’s actually been some very important work which completely refuted all that literature, including from a good friend of mine, a former graduate school classmate named David Howell, who looked at, it’s very easy comparison, he did a lot of work. But the simple comparison is if you look at the unemployment rates, for example, in Sweden, which even now, even though the welfare state has been greatly diminished, it’s still the most generous relative to the US.

If you look at Sweden’s unemployment experience versus the US, Sweden does better. So you can’t say that the mere fact that they have a generous welfare state is causing people to stay home. People will show up at work. If you give them decent wages, they will show up. If you give them really lousy wages and no benefits, sure, they will go to work out of desperation. I mean, I know I experienced this when I was doing work way back in Bolivia  where they had no welfare state and the government economists said, well, we don’t have any unemployment.

I said, well, what about all the people on the street begging? They said, oh, they’re working aren’t they. They’re not unemployed. They’re earning an income. Technically they were right. I said, well, yeah, that’s right. They’re desperate. So if somebody is desperate, mostly people will try to stay alive. That’s not the kind of society that we would call minimally decent. So that perspective has been there. Lindsey Graham is by no means original.

Paul Jay

When I look at the ratings of countries’ levels of productivity, those Nordic countries that have the strongest social safety nets are almost always in the top 10 countries of productivity.

Bob Pollin

They have higher productivity, they have a better welfare state. The tax rate, you know, taxes as a share of GDP, is about half the economy. But they have generous welfare states. People show up at work. They’re more productive because they’re getting paid more.

 You’re a different worker. We’ve studied this also in the US with respect to living wages. When you pay people the higher say fifteen dollar minimum wage, they will be more motivated. Absenteeism goes down, turnover goes down. So you say that businesses save money by reduced absenteeism and turnover because you have a higher productivity worker.

Paul Jay

Let’s go back to what Biden is proposing, who’s covered by the 15 dollar minimum wage and when, and how does it kick in?

Bob Pollin

Well, it has to pass, but yeah, I would say it’s going to directly affect people who are under $15. That’s going to be about 15, 20 percent of the workforce. But then you also get this so-called ripple effect benefits wherein people not just at $15, but when the people below $15 get up to $15, the people who are at $15 and above, they will get some wage increases as well just to keep them compensated at the higher levels than the lowest paid workers.

So, you know, the work I’ve done not in the last couple of years, but before that, you’re looking at about 35 to 40 percent of the workforce that is going to get some raise. And I think that is what we would look at, mostly affecting the lowest-paid workers, but all the way up to 30 to 40 percent.

Paul Jay

Do we know how it’s implemented? Like, is this a phase in over five years or is it going to happen quickly?

Bob Pollin

Oh, I don’t know what his proposal is. He hasn’t put it down.

Paul Jay

Yeah, I haven’t seen any detail.

Bob Pollin

I mean, of course the supporters of the Fight for $15 have been at it for several years. So at this point today’s $15 was not the $15 of five, six years ago. So I mean to get it passed would still be a major achievement, but it should be phased in quickly. And you know, the work that I did on this side three, four years ago, we looked at just the fast-food industry who will be most impacted.

And the fast-food industry we said, well, businesses can cover this with a very modest price increase. Like a Big Mac, the price increase would have to go up 10 percent, from a four dollar Big Mac to four dollars and 50 cents. And you cover 50 percent of all the costs of the $15 minimum wage.

Paul Jay

I know in Baltimore, fifteen dollars and this is two, three years ago was kind of a living wage for a single person. Add one kid and it’s not even close. I think it was a parent with two kids that was at least $20 something an hour and an even that is just barely getting by. So this idea that somehow $15 dollars, while it’s something compared to what it is, it’s no great big windfall for anybody.

Bob Pollin

No, if you look at these various living standard indicators, Economic Policy Institute does it. There’s a group at MIT that does these living standard indicators. So if you look at, for example, where I live in our area, what they say is for say a single parent and one kid to be at a, you know, a decent living standard. And they go through in terms of paying for groceries, paying for rent.

You’re looking at, you know, $55,000 a year or something like that. $50,000 dollars a year. We can argue over it. But the point is, if you’re at $15 an hour and that’s one income and it’s the whole year, that’s $30,000 a year. And so that’s $20,000 less than $50,000. So that’s not even close to a living wage in, you know, an average community such as the one I live in.

Paul Jay

OK, let’s go back to this issue of deficits and such, there are progressive economists and others who argue now that you’ve got Wall Street finally willing to accept these big deficits, why take on the political battle of a wealth tax or even increased taxation when you may not have the forces to win such? So why not just keep the deficit stuff going and worry about the taxation far down the road?

Bob Pollin

Well, I think that’s a reasonable position for the moment. And I do not think we should raise taxes in any way, shape, or form in the next year or so.

But, you know, let’s hope the economy does recover, and let’s hope we get to something approximate to full employment or at least close to it. Then we should then start having rich people pay their fair share of taxes. It is a much better long term structural solution than having to assume that we can just keep borrowing indefinitely for all purposes. We can borrow indefinitely in a crisis. I don’t think it’s a good idea to borrow indefinitely.

Paul Jay

Why?

Bob Pollin

Well, for one thing, if you get the economy to something close to full employment, then at that point you are going to be putting pressure on the economy that could create inflation, significant inflation. Could. So we don’t want that to happen. Secondly, in terms of the distribution of income.

Paul Jay

 Hang on one sec, because if you start having an increase in inflation, interest rates go up. And that debt, which is now almost negligible in terms of how much interest you pay, you actually start paying much more serious interest on it.

Bob Pollin

Yeah, probably, not certainly. The experience that we’ve been through the last 10 years and especially now demonstrates, the macroeconomy is completely different. I mean, we’re having the zero interest rate policy effectively for 10 years. We’ve never had that in history. I don’t know that any country’s ever had that history. So this is totally new. The fact that we have if you add up the deficit spending from March, now December, and then if we add up Biden, that’s twenty-three percent of GDP. We’ve never had that. We had it in World War Two, but we were fighting World War Two. That’s the only time we’ve had deficit spending anywhere close to this magnitude.

So this is new territory. And I think that it’s good for now, but we have to recognize that it is new territory, and running an economy with a deficit of twenty-five percent of GDP and zero interest rates is creating imbalances. Whether we can live with these imbalances forever, I don’t know enough to say that for sure.

And I think that we’re much better off in terms of other things, in terms of just the distribution of income to start forcing rich people to pay taxes, like they did in the 1950s and 1960s, basically until Reagan.

Paul Jay

And as part of the problem, that there used to be this pressure periodically to get interest rates back up again because there’s a section of capital and people dependent on interest income to get interest rates up so they can make more money on that capital.

But now with low-interest rates, they’ve created such a stock market bubble that maybe they don’t need that. You know, but how sustainable is it that the stock market eventually reaches Mars? There’s got to be a point where that people start to wonder what are these companies really worth?

Bob Pollin

Yeah, I mean, the ratio of the stock market to the real economy, which is the Buffett index, Warren Buffett, so a lot of people think he’s a really smart guy and he created this index.

So the difference between the level of the stock market and the level of the real economy is so huge. Again, we’re at a historically unprecedented level. Maybe Warren Buffett doesn’t know anything. Maybe people don’t really care if companies make money. They just care about the asset price, keep going up because they can’t buy bonds. Why would they buy a bond when there’s no return on a bond? And that’s what we’re experiencing. It’s probably not a good way to run an economy indefinitely.

It’s definitely not a good idea to have the stock market going up by 70 percent while people are going hungry, 20 percent of the economy. So we want to change the distribution of income no matter what. And taxing rich people is an important way to do it.

Paul Jay

Just finally, you know, Biden in the Oval Office, he hung this enormous picture of FDR on the wall right across from him. So when he sits at his desk, he looks at this massive painting of FDR. What he’s done so far is not yet New Deal proportions by any means. But as this crisis deepens, it seems to be something on that scale is what’s needed. Do you see Biden in the kind of people he’s appointed being able to go there?

Bob Pollin

Well, first of all, FDR wasn’t FDR at first either, so, you know, if Biden looks at the picture of FDR, you know, when FDR got elected, he was denouncing Hoover for running up big deficits and he was for a balanced budget. And then also, you know, in whatever, 1937, when the depression got worse again, that was because they were trying to close the deficit. It wasn’t until the war when all bets are off, we don’t care about the deficit, we’re just going to spend and defeat Hitler.

So FDR had a very egalitarian program, but it really was not entirely founded on the idea that deficits don’t matter. That got relaxed mainly during the war. So, you know, Biden, as we know, Biden was a corporate Democrat and so was Kamala Harris. They’re not left-oriented at all. But the circumstances are extreme. And, you know, maybe what’s happened and maybe we on the left can give ourselves a bit of credit, is to force people, at least some corporate type Democrats, to see reality and to respond in a reasonable way.

I would include Janet Yellen as a first case in point. I mean, she’s always been kind of a liberal Democrat type. I think she’s a genuinely compassionate person. She’s worked a lot on issues around labor markets and unemployment, and she’s treasury secretary. I think she has an orthodox mindset in terms of Wall Street. She was chair of the Fed, but I think she’s open minded and I think she hopefully can be pushed in the right direction and we can sustain an egalitarian recovery.

Paul Jay

We shall see. Thanks very much for joining us, Bob.

Bob Pollin

OK, thanks for having me, Paul.

Paul Jay

Thank you for joining us on theAnalysis.news podcast. And please don’t forget the donate button at the top of the webpage.

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2 Comments

  1. Hi Paul,

    Thank-you for your smart and diverse discussions, as I get a much better sense of the big picture from the work you do. I thought I’d share a comment I posted on Scheerpost.com that refers to this article:

    … after listening to a discussion of American financial strength on theanalysis.news from Paul Jay and Bob Pollin. It was mentioned that after the 2008 mortgage debacle, some predicted a retreat from the US dollar that never happened. The US dollar may be too big to fail, like Goldman Sachs, with wealthy investors around the world buying US gov’t bonds to protect their assets. Also mentioned was that the Fed is heavily investing in the US stock market, to prop it up, and this does not affect inflation in the real economy (as many wealthy sit on their money, where the lower classes would spend it).

    I don’t know the consequences of the US gov’t giving money to Wall Street, while depriving social or infrastructure spending: it might work in the short term, but it can’t be good for US society in the long-term. Climate change, a volatile economy and dysfunctional society, will likely put enormous pressure on US imperial ambitions. Perhaps elites will see the dollar as too big to fail, as it would create chaos and enormous losses for them, if it collapsed. However, the real economy is the basis for the financial exchanges and their stocks and derivatives. What happens when the real economy is dysfunctional or collapses: can finance survive?

    ….

    I remember reading an odd bit of history, I think from Gibbon’s Roman Empire, where a noble woman from Rome sold all her lands in Italy and moved to Constantinople in the 400s AD. She was a smart, perceptive investor of her time. Of course, the wheel turns, and the Byzantine empire was corrupted, weakened and fell to the Ottomans by 1453. Perhaps by then her descendants felt the winds change and moved to France, as it was a little premature to move to America.

  2. Well done interview.

    Only question I have left is bears make money when bulls don’t, so what is the likely scenario for the likes of Musk / Bezos. How do they cash in these inflated stock prices to buy more power, before the market deflates? In the old days, one would sell out, buy bonds/cash then buy back after the bubble popped. These guys are so huge I don’t see how they can begin to do that kind of maneuver. or are they just expecting most of the cash will flow to their stocks, so the inflation can go on forever, as relative to their own base, what they want to buy up will never inflate at the same rate?

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