Why Does the Federal Reserve Add Money into the Financial Markets?
The Federal Reserve, emphasizing its primary role in regulating the monetary system, often injects money into the financial markets to manage interest rates and influence economic growth. In the process, they buy treasury securities from broker dealers, which keeps the prices of these securities high and their corresponding rates low, targeting specific economic goals.
Understanding the Target Overnight Reserve Rate
The Federal Reserve sets a specific target for the overnight reserve rate in order to manage the money supply and influence inflation. Keeping this rate within a particular range helps to predict economic behavior and maintain stable overall economic conditions. If the Federal Reserve were to let liquidity fluctuate freely without intervention, it would risk losing control over critical economic indicators.
The Mechanisms Behind Money Circulation
Once the Federal Reserve buys treasuries, they replace old currency with new ones. Approximately 90% of the new currency that the Federal Reserve orders each year is used to replace old currency that is taken out and discarded. Each year, the Federal Reserve replaces unfit bills with fresh ones at no cost to the banks, and this new money eventually enters circulation once the banks reclaim their cash.
Economic Incentives and Behavioral Manipulation
When people hoard fiat money due to a mania for spending, central banks around the world inject more of it into the economy. This leads to inflation, forcing people to spend their hoarded savings before they lose value. By increasing the money supply, the Federal Reserve can prevent the economy from contracting, thus maintaining stability and growth.
Philosophical Underpinnings and the Financial System
To truly understand the Federal Reserve's role, one must delve into the philosophical underpinnings of modern economic systems. The British Empire, following Aristotelian philosophy, advocates for a system where some are born to rule and others to obey, often leading to peculiar and often unethical financial practices. In contrast, thinkers like Socrates, Plato, and Franklin laid the groundwork for a system that values human creativity and individual autonomy.
The American economic system, as envisioned by Alexander Hamilton and the Founding Fathers, aimed to foster a credit-based economy that would promote growth and development. Hamilton's vision, tilted towards a National Bank that could provide low-interest long-term credit to key areas such as infrastructure, agriculture, and industries, was designed to enhance the living standards and national growth sustainably.
However, over time, this system has been hijacked by the British Empire's speculative financial structure, leading to significant debt and economic crises. The current financial turmoil necessitates a revival of the Hamiltonian economic model to ensure economic stability and growth.
A Call to Action
By understanding the historical and philosophical context, one can appreciate the complexity of the modern financial system. It is crucial to rediscover and implement Hamilton's principles, known as the 'American System of Physical Economy,' to ensure a more equitable and sustainable economic future. For those seeking to contribute to this noble cause, resources such as the 'American System Now' movement offer a platform to engage and make a difference.