[repsilat]

My rough understanding of some key mechanics:

- Treasury makes bonds and sells them into the market. The market impact of this tends to increase interest rates (cost of bonds relative to dollars) a bit.

- The government uses the money raised to buy goods and services. This causes the price of goods and services (relative to dollars) to go up a bit.

- The Fed makes dollars and buys bonds. This pushes interest rates down and is roughly the inverse of step 1.

Netting the Fed and Treasury actions (which people never do, mostly because they vary independently according to independent policy), the effect of recent fiscal and monetary policy is "the government" making cash and buying things with it (as well as giving it out to people who need it.)

I guess it's the Fed's job to worry about price stability, but the above does make me think that the fiscal policy is just as relevant to inflation -- if govt spending as a proportion of the economy changes, it gets easier/harder for others to buy things. I guess interest rates mostly change behaviour, and have a less direct (though maybe no less real?) impact on scarcity.

[roymurdock]

yes, federal reserve monetary policy is much more focused on the supply side of money (m2,m3,m4) - making sure banks are well capitalized and can lend to one another smoothly in order to make loans and keep liquidity high - but this doesn't get directly translated into inflation because a lot of the "printed" liquidity isn't directly circulating in the economy (low velocity)

government fiscal policy has a much more direct effect on m0, m1 through stimulus and other direct lending and spending efforts, which have a high velocity and directly impact inflation

now...what happens if the assets on the feds balance sheet start to default?