Federal Reserve Chairman Ben Bernanke is using further quantitative easing to lift the US economy. But there's a big difference between creating more money and creating more value.
I am standing in line at the Burger Barn, wondering what the effect of the Federal Reserve’s plan to pump $600 billion into the US economy will be (an economics education makes one do strange things). The move, dubbed quantitative easing 2, or QE2, aims to spur economic recovery. Can it really do that? What is so special about all those dollars compared to the five I hold in my hand?
To get an idea, I imagine the future path of the money I am about to hand to the cashier.
The first place it goes is into the Barn’s cash register. From there it is counted into a snug zippered pouch and taken to the local branch of the First Huge Bank for deposit into the Barn’s checking account.
Here something strange happens. The five-dollar bill that was in my pocket is pigeonholed into a teller drawer. It waits to be handed out to some random customer and taken back into the swirl of physical currency. But as I see it, my five dollars is still in the checking account of the Burger Barn. It has simply lost its physical body, gone virtual. It now exists as pulses across an electronic network, and as an idea. That idea resides not only in Burger Barn’s checking account, but also as an asset in the balance sheet of the First Huge Bank, Inc., where it piles up with other people’s ideas of deposits to form a huge mountain of virtual cash.
Page 1 of 4