Despite all the trillions dollars recently printed up by the Fed to bail us out, our currency has not lost significant value. How is this possible? Why not just print up a few trillion more $ considering that the world currency market doesn’t care about changes in US dollar supply? Might as well pay off some of the deficit as well while we’re at it.
I am no Economist, but all the money hasn’t hit the street. The inflation is likely to take several months or years to hit so maybe that’s when we will see the effects in the devaluation of our currency?
The did not “print” money. The federal reserve loaned lots of money to financial institutions, money that exists only in computer tracking records. This money is owed to the federal reserve with interest when it comes due. Banks have the opportunity to lend that money to other people and entities. They are not doing so, so we are not awash in money.
Should have said “electronically produced” instead of “printed up”. I assumed the amount of money was all involved in the same ecosystem, regardless of where it currently lies.
First (as already stated), it’s not clear what the inflationary effect of this infusion will be (since lenders aren’t lending–so there won’t be much credit creation caused by an infusion of money) (and that may not be a good thing–the goal of the stimuli is to get lenders to lend more.)
Second, the current crisis is a true crisis- it might well be perfectly reasonable to suffer some long-term consequences if they were less severe than fixing the problem now (the old analogy is that CPR breaks ribs, but it’s much better than no heart).
Finally, inflation is part of what’s necessary to fix the problem–since the current problem is (in very general terms) deflationary. That is, assets are precipitously becoming worth a lot less than they once were. (for example, many houses). That’s very bad–much worse than inflation. This can be seen in the example of many homeowners–who suddenly own an asset worth a lot less than it used to be when they borrowed money to buy it–so they owe the same amount of money, but don’t have the assets they once did (and it’s a lot harder to borrow money to cover the gap.)
In simple terms, modest inflation makes it easier to get by if you’re a borrower–inflation makes money worth less.
For example–a homeowner would buy a house with $10,000 (say one year’s salary) and inflation would make the dollars worth less, but not make the house worth less–so that the homeowner would pay the loan back with $10,000 dollars, but inflation has made the $10,000 he borrowed less valuable (say, after inflation, his salary was $12,000, but no more valuable–it could buy the same things a $10,000 pre-inflation salary could buy).
Trillions of dollars disappeared from the economy, so without doing something there would be risk of severe deflation.
I understand the rationale, but am not sure why the world currency market has not shown any reaction. We’re just creating money and giving it away, correct? Does the fear factor add incentive to stick with the current backbone currency? That’s a vicious cycle.
With that something clicks and it doesn’t seem so confusing. Thanks!
Printed or not, this has created more dollars. Those dollars have been given to distressed banks. The banks are going to hold onto the money until the lending situation improves. Unfortunately, when the lending situation improves, all the banks will begin to start lending. All this extra money on the street will cheapen the dollar and result in double digit inflation.
The government doesn’t just create a bunch of money and hand it out. It collects the money from other people first, either by taxation or borrowing. So the money that’s being used for the bailouts already existed.
I take it you didn’t hear that the Federal Reserve has recently begun quantitative easing polices, which in effect do create money out of thin air.
No. The government can, and is, just creating dollars. Whether or not the government is actually printing new money is irrelevant. This is why this action will cause inflation…more actual dollars will result in a decrease in value of each of those dollars.
As others have stated, the Fed is loaning the additional money to the banks. However, the banks aren’t turning around and lending out that money; they are hoarding it instead.
[[id]=BASENS&s[1][transformation]=lin&s[1][scale]=Left&s[1][range]=Custom&s[1][cosd]=2008-08-01&s[1][coed]=2009-03-11&s[1][line_color]=%230000FF&&s[1][mark_type]=NONE&s[1][line_style]=Solid&s_2=1&s[2][id]=WM2NS&s[2][transformation]=lin&s[2][scale]=Right&s[2][range]=Custom&s[2][cosd]=2008-08-08&s[2][coed]=2009-03-09&s[2][line_color]=%23FF0000&&s[2][mark_type]=NONE&s[2][line_style]=Solid"]M0 and M2 Money Supply](http://research.stlouisfed.org/fred2/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=Off&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&&s_1=1&s[1)
Over the past six month or so, M0 has increased by about $690B and M2 by about $750B .
[[id]=EXCRESNS&s[1][transformation]=lin&s[1][scale]=Left&s[1][range]=Custom&s[1][cosd]=2008-01-01&s[1][coed]=2009-02-01&s[1][line_color]=%230000FF&&s[1][mark_type]=NONE&s[1][line_style]=Solid"]Excess Reserves](http://research.stlouisfed.org/fred2/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=Off&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&preserve_ratio=true&&s_1=1&s[1)
Over the same time period, banks’ excess reserves have grown by about $640B.
The Fed’s hope is that once money starts flowing again and inflation begins to rise, they will be able to withdraw excess funds from the money supply to keep inflation rates at modest levels. It’s not “ok”; the plan entails some risk. But the Fed is determined to prevent deflation.
Perhaps it is not ok. At least some big international holders are starting to get a bit edgy over all those trillions.
China backs talks on dollar as reserve
I like this little presentation btw. : What does one TRILLION dollars look like?:
Well, creating all of this “fiat” money will (eventally) dilute the value of everybodie’s US Dollar assets. Take China: for years they have piled up enormous surplusses. Now they are worried that the dollar will take a dive-what did they expect? The massive imbalance in trade (between the USA and China) must be balanced, and it WILL be balanced by the fall of the US $. Either that, or the Chinese will have to buy more from the USA. It is tha simple.
Interesting, does China have any concrete options to push for an alternative reserve currency? What would be the effect on the US if it lost its reserve currency status?
As I understand it, it would be some theoretical currency not controlled by any country that China wants. Rather, it would be controlled by those wise people at the International Monetary Fund.
You wouldn’t be against the UN controlling something, would you? They’re not biased at all, and will remain pure as the driven snow.
http://www.nytimes.com/2009/03/24/world/asia/24china.html?ref=asia
A few years ago [very rough estimate] about 50% of all money in the USA was in the hands of 1% of the population. So some prices were inflated (think network TV advertising & highly desirable real estate) while others weren’t (e.g., food) because the general populace had no access to that inflated money supply. (And guess what the combo of high land prices & low food prices does to farmers!)
Frankly, I’d rather just cut everyone a big giant inflated-adjusted check every year & blow the dollar’s value all to hell. And I mean every freaking human being in the world.
ETA: Not that that is my actual plan. But it sounds better than most of what’s coming from Washington & Wall Street.
If I can hijack- if there is double digit inflation, how will that affect a “normal” household. I imagine interest rates will skyrocket.