The money trail

I am writing to address inaccuracies that have appeared on your editorial page recently. First, in your anti-President Obama editorial Sunday, you stated that Obama has "increased the debt threefold." That is not even close to true. Google "national debt to the penny," select the treasurydirect site, and you can find the exact amount of the national debt for any given date. Compare the debt when Obama took office, or on Oct. 1, 2009 (when Obama's first budget went into effect) to the debt today. Why did you exaggerate?

And, John Nash recently warned against the explosion of inflation that he thinks must occur because the national government is printing money to cover its spending.

Newsflash: The national government does not print money to cover expenses. The Federal government pays for spending from tax revenues and from borrowing (issuing bonds).

Technically, our currency consists of banknotes issued by the Federal Reserve, which is the central bank of the United States. But most of our money exists only on bank ledgers. Our money supply is created by banks, which take in deposits from savers. The banks then loan the deposited money to spenders. Money is thus spent, redeposited, etc.

The Federal Reserve (the Fed) can affect this process in several ways. Banks and other financial institutions can go to the discount window, that is, borrow money directly from the Fed. They use this money to make loans, thus increasing the U.S. money supply.

The Fed also conducts Open Market operations. When the Fed wants to increase the money supply, it buys U.S. Treasury bonds from cooperating banks. The banks then lend the cash from the sale, increasing the money supply.

When the Fed lends money to banks, and when it buys bonds from banks, it pays with money that does not exist until the Fed creates it out of thin air.

During the current economic crisis, the Fed has created trillions of dollars from thin air.

However, if the Fed sells bonds to banks, it removes the money from the money supply. Also, when discount window loans are repaid, the Fed "disappears" the money. The Fed can also raise the reserve requirement, meaning that banks have a smaller portion of their deposits available to lend. Or, it can raise the discount rate, which makes borrowing more expensive for banks. This cost is then passed on as higher interest rates to the public at large.

So, the Fed has created an enormous amount of money. But it has the tools to reduce the money supply rapidly and dramatically. It can protect the value of the dollar.

Right now, inflation is a hypothetical problem. The problem at hand is recession. Let's worry about that first.

Dallas Dunlap

Brooksville