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While responding to the fiscal crisis governments of many countries follow the track of US Government (though may not hyped as much) by supplying massive amount of money in the system. Now the question arises, how to finance this supply? As the requirement of the monetary aids keep increasing,Let’s review just two possibilities that the US Regulators could have been considered while planning to face the economic crisis with stimulus packages and you can review the concerns and why the government possibly chose them during particular economic conditions, despite being criticized for doing so.
· Issuing bonds to raise money
· Printing Money to finance Government.
First, by issuing large quantity of Government bonds.
To finance the huge fiscal burden during financial crisis and termed as rescue financing by the Government. The Government has started issuing huge quantities of government bonds.
Concern – Interest RatesSecondly, With Central Bank printing more money.
If the governments raise money from the bonds, they must strive with borrowers within private sector. This may result into rise in interest rates, as Government targets the investments over private sector debt instruments and the better interest and security surely attract more investments.
The Actual effect – Set off
The present uncertainty triggered caution among investors, as they prefer to hold Treasury securities. Therefore as happening in US economy’ the Government haven’t need to do much efforts to raise finance from debts/bonds, that’s how interest rates remain unaffected with the respective move.
The Central bank as US Federal Reserve, always remain the Government powerhouse to control or influence the economy with its exclusive powers. Printing new money is one the important function that solely carried through Fed. No doubt if the Government needs, the fed definitely purchase the debt raised by the Government. Here lies a concern -
Concern – InflationLike it or hate it the bulky stimulus packages are the present reality. What mentioned above can help you to understand and analyze the important part of basic assumptions on which the Government stimulus package might build upon. There are two sides to every story. So you can access the real situation, if only you consider both.
As the Fed keep supplying whole lot of money for the Government crisis management programs, with options like’ buying the Government bonds. As there is too much to absorb and if Fed keep on purchasing Government debt/bonds with new printed money the enormous increase of money supply result into high inflation figures.
The Current Situation – Contrary Moves
Rather than inflation the primary concern of the economy is deflation, which is an opposite of inflation and usually hurt more severely than inflation. As ‘Inflation depicts the price rise, Deflation represents falling prices.
‘The Deflation and its effects’ is a broad concept to study separately but for quick brief you can consider deflation as falling prices due to reduced supply of money, also include unavailability to get easy credit, further the prices of the goods start falling and purchases get delayed in view to buy at expected lower prices in near future and this effects many suppliers, as they have to close their businesses. Economy comes to a sudden halt with a bleak long-term picture and uncertainty of the future growth.
Thus, as the Fed prints more money to buy government bonds to provide financial aid to save economy, this actually help positively by creating some inflation as a contrary move to avoid deflation.
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Economy Finance Bonds Debt Deflation Financial Inflation Fed Government Stimulus Crisis Money Prices Interest Rates Uncertainity Review Support Packages
