Thursday, August 16, 2007

Of course you knew that...

We amateur economists - which comprises about everyone - often use phrases that we think we understand when we don't have a clue. F'rinstance, we have heard much serious blather about the Fed injecting money into the economy or market. But how 'zactly does that happen?
With huge short-term loans. The Fed auctions off these loans to the banks willing to pay the highest interest rates. The borrowers use their government bonds as collateral, buying them back from the government after a period of at most two weeks. In the meantime, the banks have more cash to lend—to each other, to corporations, to anyone who's buying a house or car. [More of a short, helpful explanation]
Another phrase that most take way too literally is "printing more money". Think about it. To put actual dollar bills into the supply, how would you distribute them? Just hand some our to friends or people standing by the mint? Again, this shorthand phrase is too often taken literally. Indeed, by confusing currency with money, whopping economic misjudgments are made.
In the U.S., as of December, 2006, M1 was about $1.37 trillion and M2 was about $7.02 trillion. If you split all of the money equally per person in the United States, each person would end up with roughly $4,550 ($1,370,000M/301M) using M1 or $23,320 ($7,020,000M/301M) using M2. The amount of actual physical cash, M0, was $80 billion in 2006, roughly one third of the $261 billion in cash and cash equivalents on deposit at Citigroup as of the end of that year and roughly $266 per person in the US. [More]
Just a little awareness raising in support of a hassled Federal Reserve System.

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