Goodness. I have been thinking and researching on this one a long time. My initial reaction is the same as everyone else.... That an expansion of the money supply through "quantitative easing" will prolong economic pain and cause the devaluation of our money.
The mechanisms have been twofold:
the bailout: large investment and commercial banks were strung out on collateralized debt obligations (mortgage bundles) that were questionably rated and placed in qualified special purpose entities (qspe's), also knows as hidden off the books in a legal way with one caveat, that if they became impaired (a fancy accounting word for losing value to a point below their acquisition price), they had to be shown on the parent companies books again. Thus, when those banks had so many mortgages going sour, their balance sheets were going to go sour overnight as they had to put those dogs on the books again. That would place their credit ratings by S&P and Moody's in the shitter and then all the counterparties holding the money side of any credit default swaps on that bank would begin a tremendous domino run around the globe. Banks would instantly become insolvent. That began to happen and took out Bear Stearns and Lehman Brothers.
To stave off the chain reaction, then TreasSec Hank Paulson and NYFedgov Tim Geithner needed to get cash and reserves into the hands of banks super fast. Normally only commercial banks are served by the Fed but because the repeal of the Glass Steagall Act blurred the banking distinctions, the government and Fed included investment banks because they were on the verge of collapse and were a critical part of the equation. Money was immediately created by the Fed buying the debts of the teetering banks and adding them to the Fed balance sheet as deposited assets for member bank reserves. This became the credit facilty of every bank that needed to meet debt obligations. It forestalled chain reactions that could have halted global trade due to insolvency.
The second part was economic stimulus, which also came in two forms, both of which entail government spending plans, one ostensibly to directly create jobs through spending to jumpstart the lagging economy, the other to lower lending rates to jumpstart main street business and other borrowing in the hope of business creation and expansion. To facilitate this the ARRA was passed calling for direct Fedgov spending of 787 Billion dollars. The rest was done by the FedResBank buying government bonds in QE I, QE II, QE III, and now QE Infinity to continue to expand banking reserves for lending.
The bailout worked and was mostly paid back by banks as they became solvent again. The ARRA spent the money for the most part but we never got any significant stimulus. The Fed continues to buy fedgov bonds at a rate of $85Bil per month. The potential for money supply growth remains strong because bank reserves keep building which banks could loan multiples of through demand accounts but little is being loaned out to business in comparison to the increase in reserves. Banks are using some reserves to loan money to themselves at near zero rates to invest in commodities and equities which helps bolster the markets.
To date, however, inflation (defined as a general rise in prices) remains fairly tame. What is lagging is wages which have not grown for the average worker in a decade. The effect is the same for them--less spending power--even if the explanation is different. The question is: if banks start lending robustly in an economic expansion, will inflation rear its ugly head as the multiplier effect of demand deposit lending by commercial banks takes effect?
Some argue that it must, and the damage will be a one-sided Weimar Republic style hyperinflation. Others argue that an economic expansion will increase the demand for money and thus the increase in supply will be needed to meet that demand. Yet others argue that the Fed can contract the reserves to slow any inflationary effect, and still others argue that wages will rise to cancel the effect of higher prices. In the past, wages have risen to meet prices.
I doubt very much that gold or silver will make a come back as money in a modern society. It probably is a barbarous relic. Then again, it's value isn't going to zero any time soon either. Money is, as always, a medium of exchange, that presumably, holds and stores its value, and is enduring. Our money has failed in holding its value and as an electronic entry, it doesn't seem too enduring to me, but then again, I am an old fart now!
What modern money has done well is to be an EXTREMELY good medium of exchange, locally, regionally, nationally, and globally. The effect is to drive economic activity efficiently as possible to benefit as many as possible. To that end it has been good. Government has tried to compensate for the effect of a poor store of value through well managed economies and government social welfare programs.
So, recapping, from what I have actually SEEN, the effect of "fabricating money from thin air" HAS helped create a better economy IN THE LONG RUN. (Actually, we are creating liquidity when and where liquidity is needed, not just fabricating money for the sake of fabricating money.) It has smoothed out economic peaks and troughs, reduced economic pain, reduced economic uncertainty and risk, and generally fattened our middle. That's what I see when I take a step back and a hard look.
It pains me to admit it. I have prepared for the worst. I don't like being pushed down the path too hard. I don't like putting my trust in the government or in others. I don't like seeing my bank balance in my savings account become irrelevant over the decades. I don't like the value of frugality becoming a quaint relic of a bygone era. But these are the signs of changing times.