“Quantitative Easing Explained” is quite popular right now, but I still think a bit of background would help some of my readers:
1) The Federal Reserve is made of up private bankers. It functions as the central bank, but there is no public accountability to the citizens of the United States.
2) The Federal Reserve has always sought to minimize inflation. Why? Is inflation evil?
What is Inflation?
Most people know inflation as when prices go up. The Consumer Price Index measures the prices of common goods as a way to calculate inflation — stuff like the price of food and beverages, housing, clothes, transportation, health care, etc. When prices go up, the value of your dollar goes down “in real terms” (as economists are fond of saying), which just means that you can’t get as much for your dollar as you once did.
When Does Inflation Matter?
If the cost of stuff goes up and the value of the dollar decreases, then usually wages will go up, too, because workers will demand more for their labor to offset the rise in inflation. If you’ve been reading this blog, you might remember that supply side theorists want to keep wages low, so they don’t really like inflation because of what tends to happen to wages.
Inflation will also bother you if you lend people money (as banks do). Let’s say Sally lends Tim $100 to be paid back in one year. If inflation goes up during that year, the $100 Tim pays back is actually worth less to Sally than originally because she cannot buy as much with it at the end of the year. Mind you, Sally probably tried to estimate inflation in her calculation of the interest rate, but you get the point. Inflation is problematic for lenders, but it is favorable to borrowers.
Of course, if wages stagnate (as they have in the U.S.) then inflation can certainly be a problem from the consumers’ perspective. But as the video points out, I doubt the Fed has consumers’ interests in mind.