I'm green. Help me understand currency and debt

There hasn't been any meaningful inflation so far because the money isn't doing anything i.e. no "velocity". The Fed has simply been handing money to the banks which park it at the Fed for us to pay interest on.

"Fixed amount of currency" is a slippery term.

If I have a dollar, and I deposit it, the bank can lend it out again, and that person can deposit it, and the bank can lend it out again....

http://en.wikipedia.org/wiki/Quantity_theory_of_money

http://www.cliffsnotes.com/study_guide/Monetary-Policy.topicArticleId-9789,articleId-9750.html

I'm reading 'Currency Wars' and I'm confused on a explanation. It states that by quantatative easing, we're export inflation on China.

How does this work? Sorry for my ignorance.

What happened in 2009?

I don't think there has ever been a fixed amount of currency in the world.

"Before yr2009". I should've used the words "pre-quantatative easing". Sorry

Inflation means that a dollar that you have will buy less in the future. (Savings are worth less, and debt becomes less of a burden.)

Deflation is the opposite. A dollar bill in your hand will be worth more in the future.

One has less incentive to spend, and less incentive to borrow, during deflationary periods. This decreases the rate at which money is spent, which decreases the apparent money supply, decreases tax revenues, etc. Basically, it causes a recession and/or depression.

Since the government bonds sold to China are a debt that the government owes (and since our government essentially runs on debt in general), it would be harder for the government to pay those debts if deflation were to occur.

Therefore, the government has incentive to prevent deflation, which is what quantitative easing does.




There are also incentives to prevent runaway inflation, mainly because runaway inflation would wipe out savings and debts, essentially making everyone a pauper. (It doesn't matter if you're a billionaire, if your billions are essentially a stockpile of toilet paper.)

OK. Got it! You're good!

Is there any consequence to foreign countries as a result of QE?

Quantitative easing is not the big deal you are making it out to be. There has never been a fixed amount of currency in the world.

The answer is, "it depends on why they bought the bonds."

If they bought the bonds wanting to get a guaranteed rate of return, then the US having a good monetary policy (whether or not that includes quantitative easing) is good for them, because they get what they expect.

If they bought the bonds betting that the US currency would deflate relative to other world currencies, then good US monetary policy might make them lose their bet.


Personally, I think the whole "China's going to end up owning the US!" thing is overblown. China bought US treasury bonds. Big whoop. From the US government perspective, it doesn't matter who bought the bond; it's still just a debt to be payed off.

I don't think there has ever been a fixed amount of currency in the world.

all you are doing is repeating what others have already written -- word for word.

why?