The government’s Treasury Department controls the flow of dollars around the world by determining the quantity of U.S. Treasury debt that can be issued at the current market rate. The value of the dollars printed depends on interest rates in the two world financial centers: interest rates at the U.S. and U.K. Treasury departments are set separately, then combined at the U.S. Treasury’s central bank. Since this system is highly flexible, it determines both the level of Treasury-issued dollars and the growth of output at a country’s borders. According to the Fed, its objective is to maintain maximum employment and a stable price level.
For more of the story, check out this video from the New York Fed.
So the Fed now wants to raise interest rates, which would, we now know, cause inflation to rise. The Fed would have to cut the funds available for borrowing by the government, which would reduce the available amount of dollars for the dollar’s printing. The result would be that the flow of dollars into and out of the U.S. could rise considerably.
So is the Fed’s plan to raise interest rates the only way out of this financial crisis?
According to a 2011 paper led by economist Robert Gordon, which is published here in the New England Journal of Medicine, this is not the case.
The authors of the report, Gordon and the staff of the IMF’s Division of Monetary Economics looked at the historical evidence on the effect rates on the level of money supply on the level of inflation. According to their analysis, any increase in interest rates is not sufficient to generate significant price increases in the economy. This may be because there are other influences at work as well – for instance, the fact that inflation tends to be low at low interest rates, which is not so true at higher interest rates.
Gordon and his economists concluded that
Our conclusions about the effect of monetary policy in a low and stable inflation environment suggest that the Fed’s policy may generate some inflationary pressures for a limited period of time, and that the level, timing and degree of inflationary pressures can vary considerably between time horizons. [emphasis added]
The paper, titled “A Monetary Policy Report on the American Economy since the Great Recession,” also notes that
The central bankers of countries with low inflation and low interest rates may well experience the effects of monetary policy through direct effects on bank balance sheets without necessarily altering the level of money in the economy.
Why do we
how many youtube videos to make money, viral videos make money, how to sell photos online and make money uk, make money on photos, take photos earn money