A few years ago, a co-worker asked, "You know how they talk about the government causing inflation by printing money? Do they literally mean that the government prints that much money?"
I didn't know the answer, but I knew there's no way the Federal government literally fires up the printing presses and cranks out enough paper currency to cause significant inflation, not with most money existing only in computer databases. It would have to involve injecting money into those computer databases, but how?
The answer is that there is a special division of the Federal Reserve called the Federal Open Market Committee which directs its "open market operations". The U.S. Treasury, an official branch of the government, issues securities, Treasury bills and the like, on the open market where anyone can buy them. The Federal Reserve, quasi-independent from the government, buys and sell securities right along with everybody else, but unlike all the other buyers and sellers the Federal Reserve is allowed to buy them with money that it creates from nowhere. When someone at the Federal Reserve sits down at a keyboard and enters money into the Open Market Account, the Federal government is "printing" money.
For the Federal political establishment there are advantages of this process: it's indirect and obscure, it can be claimed that it is not a government activity, and it keeps the prices of Treasury securities attractive even when the Treasury is issuing more and more of them.
So, why am I posting about this topic now? Normally, open market operations concentrate on buying and selling short-term securities with the goal of helping to keep key interest rates at target levels. Normally, inflation creeps along at the fairly slow year-to-year rate that we're all used to, slow enough that you can find economists that will argue that open market operations did or didn't affect any particular stretch of inflation.
However, in its March 2009 meeting, as yet another government response to the current recession, the Federal Open Market Committee made an unusual decision to purchase $1 trillion in Treasury and mortgage securities, including long-term securities that they normally don't deal in -- this was a clear-cut instance of the government "printing" money to purposely cause inflation (although the Federal Reserve uses the word, liquidity, rather than inflation).
