Diary

Explaining the Fed Cash Infusion Comparing the US Mint and Franklin Mint

There was a barely reported news item last week about the Federal Reserve committing to buy $1 trillion worth of Treasury Bills.  There was a light mention that the Fed knows they have to be careful to avoid this action leading to inflation.  The reality is, a little inflation is the least of our problems when you are dealing with trillions of dollars.  With so much money, the amounts are hard to understand and people just let the news item slide by.  This may help people understand it more.

 

The Federal Reserve operates the US Mint, which prints money.  For the Fed to buy these Treasury Bills, they will have to print that $1 trillion.  To put this in easier terms, think of the US Mint like the Franklin Mint.  Like beautiful collectors plates, the value of money is impacted by how limited the supply is.  Think of the beautiful Obama collectors plates you bought that were in a series of  10,000.  You paid your three easy payment of $29.95 to buy these valuable limited items.  If you wanted to, you could trade one for other valuable items, perhaps that Clinton limited edition spoon set you have been eyeing.  Right now, you could get the whole set of 5 Clinton spoons for just one of the Obama plates you purchased.  Now imagine that the Franklin Mint decides to release more Obama plates just like yours.  You see, they had actually thought McCain would win, and are having to make up for the loss they took on the McCain commemorative chess sets.  So they dump another 10,000 Obama plates on the market.  Now, it will take two Obama plates to get that valuable spoon set.  You may not be happy, but you can live with it.  After successfully selling that other 10,000 plates, the mint realizes they also took a bath on the Sarah Palin commemorative doll line.  Plus they are still sitting on half of the 50,000 George W Bush coins they made.  Fixing all these Republican mistakes is going to be expensive.  The Mint decides that adding another “0” is no big deal, so they release 100,000 more Obama plates.  Now fewer people want them, so they offer free shipping and 10% discount on purchases of 2 or more to entice more people to buy.  Now it would take 20 Obama plates just for you to get 1 Clinton spoon.  Now you have hyper inflation.

 

That is what is at risk with the Federal Reserve printing so much money so fast.  Maybe we will get lucky and the economy will kick start and absorb all the money.  Maybe there will just be a slight decrease in the value of the dollar, but the economy gets going and things are fine.  Or maybe the economy will continue to struggle plus the value of the dollar will plunge.  Putting out more money to fix the first mistakes will only devalue the dollar more.  Then it will not matter how handsome Obama looks on that collectors plate.

 

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