My good ma’ams/sirs,
When listening to this lecture by Thomas Woods, he mentioned that the fed controls prices. How is this done?
Link to lecture – http://mises.org/media/3108
Is this done through the controlling of interest rates?
-david
Through the money supply. By creating money out of thin air. By buying (with new money) and selling (but mostly buying) securities (mostly government securities) or anything else that he likes. He also “lends” money to banks through the discount window, where the “interest” rate (that everyone talks about) is not really interest rate but just a valve on how much liquidity (money) is poured in through this window.
interest rates = price of money
Interest rates are the price of time. Pushing the market rate below the natural rate (equilibrium rate) presupposes expanding the money supply, which leads to a general rise in prices (though it does not affect all prices and incomes the same way).