What is deflation and how can it be prevented?

We finally get to the original question: "Is the problem that there is more to printing money than printing money? Is in fact the way printed money gets into circulation, that the fed buys bonds, and thus gets money into the economy?". That's precisely what happens. The money the Fed gets to buy government securities has to come from somewhere. Generally it is just created in order for the Fed to carry out its open market operations. So in most instances, when economists talk about "printing more money" and "the Fed lowering interest rates" they're talking about the same thing. If interest rates are already zero, as in Japan, there is little room to lower them further, so using this policy to fight deflation will not work well. Fortunately interest rates in the U.S. have not yet reached the lows of those in Japan.

Next week we'll look at seldom used ways of influencing the money supply that the United States may want to consider in order to fight deflation.

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