Before registering, I question and answer concerning who actually owns the fed was presented to me. Simple I thinks. Ask a question, huh? Register ok. So I register and now I have no clue where in the world I am. So I came here to ask my question about the “The Fed”.
I don’t even pretend to understand what “The Fed” does. I guess there are people who are angry about them printing money to cover deficits or to nudge the economy in the right direction.
I was just wondering, is all that money sitting in Swiss and Off-Shore bank accounts no longer in circulation… Is it just gone? Does printing more money cheapen the value of each dollar. I don’t think that would hurt me much, because I don’t have a lot of money. I usually spend what I earn. Does it especially hurt people who have zillions of dollars stuffed away in foreign vaults? Are they the same people who don’t like the fed? It’s very confusing to me, but in your answer you mentioned the post office as a non-govt sort of linked though business. You can say the same about the Supreme Court but they are most certainly ruling based on ideologies these days. So is “The Fed” acting in my behalf or on behalf of the money hoarders? I am new here, so I will try to look for an answer, but if you notify me if I am answered it might help to this newbee thanks.
If the USA is worth $100 dollars and $85 of those dollars are in an “inactive” state in foreign bank accounts, how do we run the daily business of capitalism on the remaining $15.00? What is the effect of “hoarding” money? Do people like me who spend their money help the economy and shore up capitalism more than money stored away in vaults?
Welcome to the Straight Dope Message Boards, Double-B, we’re glad you found us and we’re sorry if it was confusing.
The forum you posted in, is generally for people commenting on an existing question of Cecil’s. Questions of a general nature, with a specific answer, tend to go in the forum called “General Questions,” so I’ve moved your question there and I expect you’ll find people answering you.
It does take a while to figure out our organizational structure (term used loosely, I sometimes think it’s simply chaos), but you’ll get there. It’s not a problem if youv’e posted in the less appropriate forum. And, as I say, welcome!
“Printing money” is a metaphor. Actually the Bureau of Printing and Engraving does that.
What the Fed does is buy and sell bonds. Bonds are an agreement to pay a fixed amount of interest per year. So if you drive the price of bonds up, the interest rate goes in the opposite direction. Here’s a formula:
interest rate = Fixed Interest payment/Price of bond.
The point being is that the Fed can raise and lower short term interest rates depending upon whether the economy has excess capacity or not. Right now, the Fed is trying to drive interest rates down to stimulate the economy. When inflation picks up across a wide range of products and the recovery is on a sure footing the Fed will raise interest rates to keep prices under control.
There’s more to it than that. “Expectations” are what is being emphasized with the latest Fed move. But the preceding is a start.
I would say that the only money that’s uncirculated and not affecting the economy is stuffed in someone’s mattress (or the equivalent).
Money in a bank account is definitely not gone or out of circulation. It’s not even in the bank anymore - banks keep reserves, which are a tiny fraction of deposits on hand. A bank uses your savings account as funds to make additional loans. They pay you interest to give you an incentive to put your money with them. So, if you deposit $1 million dollars, the bank might loan $200,000 so that I can buy a house, $25,000 so that Joe can buy a car and $675,000 so that a small business can get started. The last $100,000 (assuming a 10% reserve requirement, which is actually high) would be kept at the bank.
It could even be that the bank doesn’t keep the money in the same currency. There’s no reason a bank can’t enumerate your account in dollars, but convert those dollars to yen if there’s a Japanese borrower who wants a loan.
As for who owns the Fed or what they’re motivated by: they’re authorized by the US government. They have several functions in regards to how commercial banks operate. Their biggest-picture function is to regulate money supply, economic growth, interest rates and inflation (since these are all inter-related). The Fed’s goal in regulating these is stability - in an ideal world, they’d have moderate growth and low inflation all the time.
Expanding on previous posts, the Federal Reserve’s mandate is to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates” through monetary policy.
The Fed is granted the power to manage the money supply; it can create and destroy money. When it wants to expand the money supply, the Fed creates new dollars and purchases bonds with them. When it wants to shrink the money supply, the Fed sells bonds it had previously purchased, receiving dollars for the sales, and takes the dollars out of the supply.
In principle, expanding the money supply should increase prices and decrease interest rates, at least in the short term. Conversely, shrinking the money supply should decrease prices and increase interest rates. Currently, the Fed is trying to increase employment by decreasing interest rates, hoping to influence banks to lend out money, and to get individuals and business to spend and invest.
It’s been difficult to get folks to spend and invest, however. As a data point, in the past four years, the Fed has injected roughly 1.82 Trillion additional dollars into the economy. During this same period, Excess Reserves grew by an additional 1.48 Trillion dollars (Excess Reserves are basically money that banks are holding back; money that is sitting idle).
So the Fed will try to expand the money supply even further, hoping that at least a percentage of those additional dollars will make their way into the general economy and spur economic growth. The risk is that Excess Reserves will likely grow even larger as a result as well. There is then a potential risk in the future that if the economy starts to pick up, banks will start quickly lending, and folks start quickly spending. Excess Reserves may then start to get spent rapidly. The Fed, in turn, would then need to act quickly to shrink the money supply to combat price increases.
The forum you posted in, is generally for people commenting on an existing question of Cecil’s. Questions of a general nature, with a specific answer, tend to go in the forum called “General Questions,” so I’ve moved your question there and I expect you’ll find people answering you.
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I suspect he was commenting on the article Who owns the Federal Reserve?, based on a couple of oblique references in the OP.