Money In The Bank What Do Ya Think?

The Federal Reserve has recently put $600 billion back into circulation with its purchase of treasury bonds.  In so doing the Reserve hopes to artificially inflate the dollar which will not only have a large impact on the American economy, but the global economy as well. Hypothetically with the bonds purchased from the banks the Reserve hopes the money will do multiple things on the domestic front. First it will grow with interest, second create more jobs, third increase exports, and fourth lower loan interest rates. Through the use of inflation more money will be in circulation which subsequently devalues the dollar.  This is not necessarily a bad thing, because homeowners will find it easier to pay their “fixed loan rates”. The dollar may lose the purchasing power it had before the inflation; however the loan value stays at the rate is was before the inflation. Simply stated the homeowner has a larger amount of money in the bank, the money is less valuable than before the inflation but it still has the same purchasing power as before when it comes to their fixed rate home loans. By increasing the money supply the Federal Reserve also hopes to create more jobs. This theory is known as the demand pull inflation theory.  Simply put, this theory states that with more money in hand, American’s will be purchasing more. With this increase in purchasing, product demand will increase, and with the increase in product demand, labor demand will also increase so that the supply of products will match that of the demand for them. This counting on of course that American will spend more, and not decide to save it. Globally t he devalued dollar will make products manufactured in America cheaper, thus hypothetically will increase exports, because foreign companies can buy our good cheaper than theirs. This is similar to what China has been doing this year. Due to the fact that exports are still only a small percentage of Americas GDP, this may not have an overwhelmingly large effect on our economy. However it may have a large effect on countries like China or Germany, who’s GDP is largely made up of exports. Even though America does not export many good, the good we do export we do in large quantities. China and Germany may feel the effects of this because other countries will turn to the cheaper American exports, as oppose to theirs. This large change in monetary policy will undoubtedly have some effect on our economy, however only time will tell if it will be a positive effect. With the amount of spending the government is doing, coupled with our large debt, it is a tad disconcerting to have the dollar weaken. If this all fails however, the barter system did seem to work well for the Romans. :)