Ned Pepper's Outrages

Thursday, December 16, 2010

Ned and the Federal Reserve

Ned has decided to take that uniquely American approach to the Federal Reserve, that is, to write definitively about it without having a clue as to whether what he writes is true or not. Here goes:
The Fed prints money. All. It. Wants. But then it is left with a dilemma: what to do with all that printed money. Apparently, one thing the Fed does is to take that money and use it to buy Treasury Notes and Bonds. Then the Fed sends the dollars, either as a check or a truck or satchel full of cash, to the Treasury, where the money is deposited in whatever federal account needs the money. Then that outfit, say, the EPA (unlikely, of course, but let's just pretend) writes a check to someone or some company to pay for something they did for the agency that was authorized by Congress. Then that consultant or company takes that money and buys something, say, a toy made in China laced with lead and/or chromium and gives it to a kid for Christmas.
Ned assumes also that any bank that wants could borrow money from the Fed at, say, one percent interest and then loan it OUT to someone who took out a loan, say, to import chromium-laced toys from China, or someone who wanted a new, gas-guzzling SUV made by those newly minted "green" companies, GM and Chrysler, bailed out with taxpayer dollars, presumably also printed by the Fed. So why don't banks lend more money, or why don't people or companies borrow more money? Maybe people are still trying to pay down the loans that they took out in the first place.
Ned proposes that the Fed consider offering any citizen the same deal it offers to banks and the Treasury: borrow some of our newly-printed money at, say, one percent a year and spend it. When you need to pay it back, come back and borrow some more, since we (the Fed) can always print more if and when we need to. And this will work as long as there is insufficient demand for all the goods and services available "out there." But when demand rises to meet supply, the Fed will have to stop, since if they keep it up they will cause inflation, and we will need wheelbarrows full of money to buy an apple from that out-of-work street vendor without shoes.
Thus ends Ned's macroeconomic lesson for today.

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