Economics Questions

Re: A few questions about the Fed

Charles Anthony — Thu, 18 Jun 2009 16:17:52 GMT

krazy kaju:
"They" (if you are talking about the Fed) think it is good for the economy.

I would not even give them such benefit of the doubt.

Inflating the money supply redistributes wealth. If I had to guess, I believe their motives are strictly to redistribute wealth into the pockets of their cronies.

Re: A few questions about the Fed

krazy kaju — Thu, 18 Jun 2009 15:21:54 GMT

inquisitiveteenager:
Why do they love inflation so much? Even when the money supply is huge they seem hell-bent on inflating.

They don't love inflation, since inflation is only a by-product of what they love: low interest rates. Low interest rates stimulate capital formation, which creates economic growth. So, the Fed lowers interest rates by printing additional money and buying bonds with that money. Since that money enters the credit market first, interest rates are abnormally lowered because the people who sold the bonds to the Fed now can use the newly created money to buy more bonds than previously, driving down interest rates.

Why do we hear in the papers that banks are reluctant to lend, since banks create money that only comes into existence when borrowed, how would the bank lose if the customer could not repay?

Banks cannot actually create their own money. They have to take money out of their reserves when a borrower wants to use that money. The problem is that when borrowers cannot repay that money in a timely fashion, then banks cannot pay back their creditors, causing the bank to fail.

When we recover from the bust, they begin inflating straight away? What is the point of this?

"They" (if you are talking about the Fed) think it is good for the economy.

A few questions about the Fed

inquisitiveteenager — Thu, 18 Jun 2009 10:11:25 GMT

Why do they love inflation so much? Even when the money supply is huge they seem hell-bent on inflating.

Why do we hear in the papers that banks are reluctant to lend, since banks create money that only comes into

existence when borrowed, how would the bank lose if the customer could not repay? It's not as though

typing a few digits in a computer is hard work, probably costs 2 cents.

When we recover from the bust, they begin inflating straight away? What is the point of this?