[katyseagull]

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When we say "printing money form nothing", it's a figure of speech. The money doesn't need to be physically printed to expand the money supply. An entry is simply created in an electronic account at the Fed, and then the Fed purchases government securities from special brokers during "Fed Time" in open market operations with that newly created money, via wire transfer I believe (although I'm not sure; the Fed might physically cut a check). Those brokers then deposit those funds in the commercial banks, where they become increased reserves for the banks. If commercial bank reserves are increased by $50B in this manner, the banks can then create up to a total of $500B via loans, by the magic of fractional reserve banking, if the reserve rate is 10% for example. The artificial lowering of the interest rate of course encourages people to take out these loans, which is what actually does most of the expansion of the money supply.



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Thanks for addressing all my questions to you Borodog. I really appreciate the time you put into your OP! Awesome.

A lot of this stuff is a little over my head but I want to see if I understand some of the basic concepts. Forgive me if I screw this up but what the hell, here goes.



Lowering interest rates by increasing reserves

Are you saying that when the Fed lowers interest rates it first creates paperless funds (in other words expands the money supply) for commercial banks so that they can make more loans to people. So making more loans to people is the big goal right? Is this the first step in lowering the interest rate or did I misunderstand you? Sorry I'm sounding so ignorant, I just did not realize that the term "lowering the interest rate" meant creating more funds for banks to loan out.

And why would banks want to make all these loans if people are in such a shaky position with high mortgages and credit card problems? I would guess they don't want to loan to private citizens as much as they do to businesses and corporations. Gah, economics and I are complete strangers [img]/images/graemlins/grin.gif[/img]