Monday, September 27, 2010

Power and Money

The Federal Reserve issues money into the economy and withdraws money from the economy. So do you. When you borrow money and spend it, you take money that is not circulating, and circulate it. When you pay down a debt, you take money that is circulating, and put it back into cold storage.

It costs us money to do that. It costs the Fed power when we do it.

The higher the level of private-sector savings, the bigger the pool of loanable funds. This pool of funds competes with the Federal Reserve as an issuer of money. The bigger the pool, the more it can interfere with the Fed's plans.

Monetary policy has become less effective against inflation because the pool of loanable funds has grown large.

It is no coincidence that our word "investment" also has a military meaning.

1 comment:

The Arthurian said...

The irony in this is that it was the government's own policy, supported by the Federal Reserve and the American people, which encouraged the growth of that competing pool of loanable funds.

The greater irony is that now, after 40 years of early warnings, now that the crisis has come, now people wag a finger at the Federal Reserve, believing the Fed is the source of the problem.