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Originally Posted by pommysmommy
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Great article in economic terms this is called "Open Market Operations"
Just a quick basic econ trip
The Fed controls what is called "Monetary Policy."
The Feds main job is to maintain financial stability and price stability, through the control of the money supply
The Fed has a number of actions it can take to maintain control of the money supply
1. Open Market Operations in which they either Sell bonds to the public and foreign investors (This takes money out of the system or in other words they make the money disappear). Or Open Market Operations in which they issue new bonds (make money appear in the market)
2. Discount Rate - This is the rate at which they charge banks to borrow money (this has been in the News, because it keeps liquidity in the market etc and allows banks access to additional capital at an extremely low rate etc)
3. Reserve Ratio - This is how the Federal influences the money supply by creating money out of thin air (This works because our banks operate on what is called a fractional banking system. The higher the reserve ratio the less power banks have to create money out of thin air. The lower the reserve ratio the more power banks have to create money out of thin air)
Just as a side note the banks create money out of thin air through lending out money on deposit etc (not as complicated as it seems, but not worth going into on here, look it up if you want further review)
There are two ways our government pays for the programs we all crave and want.
1. Taxes - Fiscal Policy
2. Printing Money - Monetary Policy
Okay, so when government want to sneakily give you tax breaks or not raise taxes, to fund programs they cannot afford, they usually start to print money. The effects of printing money are initially positive, because an increase in the money supply raises, prices, incomes, and inflation, but many people do not notice the increase until well after the money has significantly brought us out of a recession etc.
I knew this was bound to happen there is a close correlation with inflation and an increase in the money supply. Typically an increase int he money supply is always followed by a sharp increase in, inflation.
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