By Sam Aydlette
Many people are convinced that the Federal Reserve System is necessary for the continued prosperity of the United States. Yet few understand how the Federal Reserve operates. There are many misconceptions about both the role that the Federal Reserve plays and the consequences that result from its actions.
The Government borrows money from the Fed, which prints money out of thin air to purchase treasury bonds from the Government, which then pays them back with interest. In addition, the Fed prints money and creates assets that big banks use as their reserves when they lend money. Printing money out of thin air in this manner creates significant economic problems. For every new dollar created the value of the dollars already in existence decreases.
One of the biggest consequences of inflation is that it impacts poor people disproportionally. People living on fixed incomes, social security and welfare recipients, and those who work on fixed hourly wages suffer the most as the value of their labor or savings decrease proportionately to the cost of living. Any money that they do manage to save loses more and more value over time because the value of the dollar itself is decreasing.
While few Americans are cognitively aware of the inflationary actions of the Federal Reserve, there is a general perception of significant inequality within the system itself. In fact, people would be absolutely correct to assume that the game is rigged from the start.
Tags: Federal Reserve, Inflation