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Politics : Politics for Pros- moderated

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To: skinowski who wrote (391504)	11/5/2010 7:29:29 PM
From: LindyBill	2 Recommendations Read Replies (2) of 794358

Where does the Fed get the money to buy those bonds? It's a bookkeeping entry. The definition of inflation I accept is: "A general price rise caused by the money supply increasing faster than the GNP." Let's say the Fed buys X amount of bonds, and the Banks get X amount of money for them. If the money is not put in circulation, but simply remains on the Bank's books, there is no real "increase in the money supply" until the banks lend it out. In this situation, if the GNP was increasing and the banks did not lend, you could have deflation, even though the Banks of tons of new money on the books. The Reserve is doing this in an attempt to get the Banks to lend more money. As long as they have no confidence in what is going on, they won't lend more out no matter how much cash they have on hand. They will keep it in the "overnight" market. An interesting side effect of this action is that it saves us money. The Bonds that the Reserve buys back no longer have to have interest paid out on them. Cuts our interest payments.

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