Originally Posted by
ryan1234
Those who insist that Federal Reserve policymakers have the ability to simply print up as much money as they want are completely right in one sense, but they perhaps fail to realize that the bulk of the money supply is in the form of circulation credit, which banks, rather than the Fed, produce. The Fed directly controls only the monetary base, which is basically comprised of physical currency and bank reserves. When the Fed purchases securities through its open-market operations, the monetary base increases by a corresponding amount, but it is ultimately the banks and their customers who determine the amount of circulation credit built on top of the monetary base. This is where the idea of the Fed "pushing on a string" takes its meaning. The Fed can let out slack to the banks by buying securities from them to increase their reserves, but it cannot force them to take up that slack by loaning those reserves to businesses.).
What about when the securities that the fed "purchases" are U.S. Treasurys? This has been rampant over the last 4-5 months. The fed buys U.S. Treasurys, providing cash to the Treasury which is spent immediately and in full. I understand this is incidental to the point of the article, but the federal reserve absolutely has the ability to directly increase the amount of money the economy. This is a dangerous slippery slope to hyperinflation.
Originally Posted by
ryan1234
Unfortunately, deflation tends to be politically unpalatable because it causes, among other things, a temporary increase in unemployment as capital resources are reallocated to more productive sectors.
In addition, deflation penalizes debtors, who are the helpless victims du jour.