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Interested in how the Fed injects liquidity into the economy?

Well, this article by John Mauldin is a nice starter that goes beyond the B.S. you'll hear on TV. There is a thing called "Velocity of Money" that affects how the economy grows:

When most of us think of the velocity of money, we think of how fast it goes through our hands. I know at the Mauldin household, with seven kids, it seems like something is always coming up. And with Christmas looming, the velocity, at least in terms of how fast money seems to go out the door, seems faster than normal.

Velocity of Money decreases as we head into a recession. That is, less money is exchanged at a diminishing pace, which helps lead to lower Gross Domestic Product. But it's also related to the Money Supply, which is also detailed in the article:

While the Fed did create the T-bills, they did not inject new capital into the overall system. If a bank had one billion in assets and gave the Fed $100 million to get liquid T-bills, it still just has $1 billion in assets. Yes, it could sell them to someone else to get cash, but that someone else would use already existing dollars. The Fed has provided liquidity but did not inject (yet) new cash into the overall system through this program. At some point in the future, when banks are once again doing business with each other and the system is more liquid, banks will take those T-bills back to the Fed and receive back whatever collateral they used to get them in the first place.

It goes on from there and is a very clear-cut description of what's going on today in these historic times. Awesome graphs with a few predictions of the next few years...

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