I hear on the news that the US government is printing money to fund the bailouts, economic stimuli and other currency-intensive governmental plans. However, I’m wondering if there are underlying principles that are actually being utilized to accomplish these goals but its just easier for the media to say that “we are printing money”. From economics classes in college, I remember that, to control inflation, the government would buy and sell government bonds (sell them when the government wants to take cash out of the market, and buy them when the government wants to infuse cash into the market).
So, my general question; is the government currently selling bonds to fund its plans, are is it truly simply printing money to come up with the cash to accomplish its goals?
The Federal Reserve recently began using a process called Quantitative Easing to increase the money supply. To quote Wiki on how this works:
Note that this money is being used to increase the amount of money banks have available to loan, to stimulate the economy, not to directly fund government operations, which are still being paid for by taxes + bond sales. It still has an inflationary effect though.
So, to clarify; we’re not just printing money and handing it over to satisfy debts. Instead, the government is printing money, then handing it to banks in exchange for government bonds that had been issued at some point in the past. The banks then use that printed money to satisfy debts (i.e. bailout). In other words, the government is buying back government securities that the banks had invested in to provide cash for the banks. Does that correctly represent the answer?
The banks are selling their government-backed securities to the Fed and receiving newly created money, resulting in the expansion of the money supply. The hope is that the banks will loan out the extra cash. In reality, the banks are hoarding the cash in anticipation of future losses. Banks must maintain Federally-mandated minimum capital requirements at all times and can never allow themselves to fall below these minimums.
On the Fed side of things, it buys up government-backed securities from banks in exchange for newly-created money. The Fed then holds these securities on their balance sheet. The securities are not simply destroyed so it’s incorrect to say the Fed is “buying back” government debt. Should inflation rise too high, the Fed then sells the government securities that it owns, obtaining money from the buyers. This effectively removes money from the money supply.