Friday, November 12, 2010

More Stimulus

Republicans and Tea Party followers would not like to see a second stimulus, but the Fed has a different opinion.  The Federal Reserve Bank, headed by Ben Bernanke (stayed over from the Bush admin), announced it's plan to print $600 Billion dollars to buy our own treasury bonds.  This does a number of things to stimulate the economy.  It lowers the value of the US dollar, making American goods cheaper for export and makes tourism in America more tempting to foreigners.  Come have a stay in one of Central PA's quaint country Bed and Breakfasts! You may even experience some partisan ruckus first hand!  (May I just insert here that my son has been napping for over two hours.)  It will also set the stage for low interest rates in the long term.  This is because an increase in money = inflation = decreased interest rates. What good are low interest rates?  Well, low interest rates make it easier for people to borrow.  This is good for borrowers, but bad for the entity giving the loan, since they will see low returns on their investment.  So, we will see if this money infusion will lend itself to easier borrowing for you and me (assuming you are not a big bank). 

Some may argue that the middle part of that equation- inflation- is a reason for concern.  The Fed asserts that we are in such a deep hole from what has happened over the past decades (bubbles, tax changes, 9-11, wars, wall street, oh my!) that the growth needed to spur inflation simply will not appear. 

According to some economists, the better way for our economy to get this stimulus is through fiscal policy (that is government spending) and not monetary policy (that is interest rates etc. through the Fed).  Why?  Because government spending can put money right into the hands of people, who will spend that money, creating demand.  Big business and banks have money, what we need is support for the demand side of our 'free trade economy' equation. 

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