Federal reserves?
This is probably a stupid question but it randomly came to my mind... if the federal reserve distributes our currency and it is a private bank funded by investors, then what are the investors investing( is it precious metals?)... can someone please give me knowledge on this...
Comments
Not a stupid question at all...but they don't actually "invest" in anything!
The Federal Reserve's "job" is to just print enough new US dollars each day to maintain the net "average number of dollars per human in the world" at a stable level...this extra currency is introduced into the system through the sale of Treasury Bonds, which are promissory notes that pay out interest every six months at a published rate, and which Banks, businesses, individuals, and foreign nations buy "at auction" because while the rate is low, it is guaranteed....after all, when they need the money, the Fed can just print more!
The US dollar is "backed by the full faith of the US government", that is all!
Uh, the federal reserve is NOT a private bank funded by investors.
currency aint introduced into the system by selling treasure bonds as such- selling them takes money OUT of the system (cos they cost "money" to buy and you get a bond (not money) in return)
bonds are sold cos the government aint got enough to pay its bills so sells them as a kind of loan, then uses the money to pay its bills
(its bills includes salaries paid to federal workers, and THEY put the money into circulation, by buying stuff, paying rent, etc
this aint "new" money - its the money the people used to buy the bonds put back into circulation
Its the "lubricant" of the financial system if you like
the fed cant just print money as it needs it - cos that
1) increases inflation 2) devalues the currency 2) pisses off bond holders cos they now hold a piece of paper (the bond) that has decreased in value
4) cos they are pissed off they are less likely to buy your bonds in future
Main reason
It legally cant - new currency issued must be covered by bonds - and these are held by the treasury in exchange for allowing new money to be printed
Since bonds are a kind of loan the government is in effect "borrowing" money (by issuing bonds)-
HOWEVER there is a limit on how much the government is allowed to "borrow" set by congress (the debt ceiling - and there is a crisis right now regarding that ceiling - cos the government has already overspent it by $3biilion (or it could be $3trillion)
(and a very important thing to think about is
The government of the day (say republican) can borrow HUGE amounts in order to pay for say lower taxes leaving repaying the loan to next governments (say democrat)
So you have a democrat government having to cut back on spending and "hurting" the electorate (cos they cant borrow any more), in order to pay for republican spending which benefited the same electorate
i.e the republicans get the praise and the democrats get the blame
You think it cant happen?
Well Bush jnr did the spending and obama got the blame
bit further back in time
reagan did the spending and clinton got the blame))
and it dont necessarily need to- all its gotta do is buy back some of the bonds it issued (THEY now pay cash and get back a piece of paper) - so now THAT money is back in circulation)