<p>Ok, my understanding about inflation of a currency and therefore prices is when more currency is introduced. So the Fed prints more money and the currency is worth less and thus we have inflation. My question to All of you is </p>
<p>WHERE AND HOW DOES THE MONEY GET INTO THE ECONOMY? </p>
<p>Do not try to insult me like I am an idiot. I just want answers and input to a question. I will admit this is a very confusing subject.</p>
<p>If you have an interest in the Federal Reserve and how it operates, go directly to the source and read Alan Greenspan’s “The Age of Turbulence”. Greenspan was Chairman of the Fed beginning with the Reagan administration and lasting through most of the Bush years. Unlike Paul who is a doctor, Greenspan is both a Libertarian economist and a member of Ayn Rand’s Salon in New York (which lasted until her death in 1982). </p>
<p>The causes of inflation are complex and Greenspan’s book explains it within the context of the global economy…of which the US is a part. His explanation of how the Fed operates to control the credit markets and to keep inflation in check is more cogent that any video on You Tube. Limiting inflation is a delicate balancing act that takes into account expansion and contraction of the money supply (through interest rates), the value of domestic goods and services, and the level of banking, corporate and government debt loads. Much of Greenspan’s analysis is predicated on the GDP (Gross Domestic Product) and not the GNP (Gross National Product). Prepare yourself to learn the differences between the two. </p>
<p>Be warned: this is a 500 page book. The first half is the most accessible to the average reader (i.e. someone with a four year college degree). The last half requires some” heavy lifting” (i.e. a serious economics background)… Good luck!</p>
<p>You did not answer my question michuncle. WHERE AND HOW DOES THE MONEY GET INTO THE ECONOMY</p>
<p>Here is another question I have no clue about. WHY DOESN’T THE FED SHOOT FOR 0 PERCENT INFLATION? WOULDN’T THAT MAKE PERSONAL PLANNING AND BUSINESS MUCH EASIER.</p>
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<p>The answer to that question is complex. Many economists view a low rate of inflation as healthy. For one thing, it enables the economy to deal with the phenomenon of sticky prices (prices that will easily adjust upwards but not downwards; wages are a great example of this); a low rate of inflation enables the economy to absorb the effects of sticky prices without adverse consequences.</p>
<p>Another reason for not shooting for 0% inflation is that the Fed is (clearly) not perfect; occasionally it will miss its targets. Shooting for 0% inflation could result in deflation in some cycles, and deflation is something we very much want to avoid.</p>
<p>Jclay, you need to study more economics. That will answer these questions (and create new ones). Asking random people on a message board is not the way to learn econ. The book I suggested is a very easy read, and it’s great for an introduction to general concepts. Beyond that, take your economics class; read your textbook; and talk to your teacher. Shouting questions on here is not a productive way to learn.</p>
<p>Ok, well just today I asked my ECON proff and he was of no help whatsoever. Did not even understand what I was trying to ask. So I will put it up again. </p>
<p>WHERE AND HOW DOES THE MONEY GET INTO THE ECONOMY? Is such a confusing question that a well educated community of people can’t answer it. Any input is appreciated.</p>
<p>“WHERE AND HOW DOES THE MONEY GET INTO THE ECONOMY?”</p>
<p>The question I think you’re asking is this: What is the history of legal tender in the US? By “money”, there is paper and coins that are backed by “species” (gold/silver) and paper and coins that are not. The “money” in your wallet is not backed by an equivalent amount of gold in Fort Knox. Instead, the value of US money is backed by the Full Faith and Credit of the US. A dollar is worth a dollar because Washington (the Federal government) says so. Why did this happen? Blame it on the Civil War.</p>
<p>The Legal Tender Act of 1862 allowed the US government to print money not backed by either gold or silver. These “greenbacks” were meant as a temporary measure to pay for the Civil War. So much for temporary… </p>
<p>By 1870, lawsuits challenging the 1862 Act reached the Supreme Court which ultimately ruled in favor of the government. Look up the Legal Tender Cases. </p>
<p>If this doesn’t clarify your question, then you need to find a way to re-phase it…</p>
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I’d amend this to say that a dollar is worth a dollar because people believe and act as if a dollar is worth a dollar. Washington means nothing if the people don’t buy into it (no pun intended). You can use a piece of paper at a store to pay for milk because the store owner believes that the piece of paper has a certain amount of worth.</p>
<p>Is your question about how paper money gets into the economy? Do you mean how “money” got into the economy at the beginning of time, or do you mean how money today is physically produced and distributed and who decides how much of it is produced?</p>
<p>Some years ago (I think it was a 60 Minutes segment), an artist (in Maine?) produced her own “money”. She was able to spend it in some of the town’s stores for stuff. As long as the “chain” remains unbroken, her dollar was, in the eyes of some, worth a dollar. </p>
<p>And I agree that the OP’s question of “Whence Money?” is vague.</p>
<p>You guys are still missing my question. Basically I am asking how they inflate. If I am the FEd and I give out a loan, the money supply is increased. But, when that money is paid back with interest the money supply is decreased. So how do they inflate?</p>
<p>The Fed does not give out loans. The Fed controls the credit market by raising and lowering the prime interest rates that banks can charge to their best clients. Banks lend money to companies so they can expand their business in order to make more money. The “money” is already in existence in the form of stocks, bonds and deposits. This pool of capital can then be lent out to make money. The only question is at what interest rate the banks will charge to the customer. </p>
<p>By setting the interest rate for financial institutions, the Fed can either lower the rate (easy credit) to encourage economic growth or raise rates to slow economic growth down in order to combat inflation. Economic growth is governed by consumer demand. Inflation is measured as increases in the cost of goods and services relative to wages and interest rates. </p>
<p>Your comment about a borrower paying back the loan amount plus interest as decreasing the money supply makes no sense. That you believe the Fed is in the business of loaning out money raises serious questions about your fundamental understanding of economics…</p>