More and more people have become familiar with the impact that Federal Reserve policy has on the economy. It’s easy to latch on to popular criticisms which deliberately leave out finer details for the purpose of saving time. We’ll now look into some of these finer details to more clearly understand the process by which the Federal Reserve finances the federal deficit, and then we’ll examine the consequences that deficit financing has on the economy.
The U.S. federal government ran a 1.3 trillion dollar deficit in 2011, and we should expect a similar number for 2012. In order for the government to borrow 1.3 trillion dollars, the U.S. Treasury must issue 1.3 trillion dollars of debt by selling notes, bills, bonds, and securities. The federal government then takes the money made from those treasury items and Continue reading