When I was in my fifth grade I learnt about the human circulatory system that involved a fascinating study of how blood was generated, the different parts of the human body that it flowed through and where it went back to. Years later, now when I’m a part of this economy drama, I can’t help but remember the human circulatory system once more. Today, when I see the dynamic changes in the stature of money when it comes to the economy of a country or a household, I feel money is like your blood. It gets generated at one place, flows through the entire financial system and then gets replaced by new money every day, just like our blood cells. When we have suffered ‘economic anaemia’ for so long and are on our way to recovery now, it makes sense for us to know the dynamics of money so that we cure ourselves of this ‘anemia’ and prevent it from happening again. Also since financial literacy is the new age demand, getting acquainted with the financial circulatory system is very much in place at the moment.
The Federal Reserve is the heart of the entire financial circulatory system. This is the ‘organ’ that pumps the money into the entire circulatory system. This is the mother bank that supplies money to all other banks including the bank of America, People’s and Well’s Fargo. These major banks are all dependent on the Federal Reserve for their monetary resources. The heart is responsible for maintaining adequate circulation of blood in the body and so is the Fed that maintains the circulation of money in the entire country. It sets the monetary policies that include the interest rates of lending to other banks. This determines the amount of money inflow in the system at any particular time. Now as you know, the flow of blood is influenced by many factors like heart blocks, hypertension and less production of blood. Our cash flow is also influenced by similar factors prevailing in our financial circulatory system. The recession has resulted in the production of less cash. Rather blockages in our financial hearts like inflation have created greatly lowered the circulation of cash in our economy. Low-interest rates on lending make abundant money available for circulation which again is not a very healthy symptom. You can come to know about the weekly and monthly supply for money in circulation from the M1 and M2 reports of the Fed. The Wall Street Journal is the best place for you to find reports from the Fed.
The Arteries and Veins
The Internal Revenue System constitutes the arterial and venular network of the financial circulatory system. How does the government supply money in the economy? The government pays money for different programs like subsidies, or welfare programs. Now how does it do that? It supplies money, by first taking money from somewhere else. To supply oxygen to the body the arteries have to be first filled with oxygenated blood. The government gets its oxygen…oops…I mean cash from the different taxes that it levies on people. Income tax in different forms like corporate income tax, property tax, excise Financial Physiology tex, gift tax, etc., supply the money for being distributed in subsidy and welfare programs, relief funds etc.
The Target Organs
The ones who benefit from subsidies are the ones who are getting most of the financial blood (money). They are the ones that are well supplied with money by the government- for example, farmers and low-income groups who are given a lot of facilities through subsidies there are a lot of small-scale businesses and industries also getting a lot of government aid in the form of subsidies. As their survival is important for the nation they are funded by the government. The government collects tax from a certain section of society and pays it up to those target groups in the form of subsidies and welfare schemes. The middlemen who are involved in conducting these subsidy programs are also benefited well by this.
The Capillary Systems
The heart supplies blood to the arteries that further divide into capillary networks that supply blood to the innermost cells of the body. Apart from taking up work directly, the government appoints contractors to take up its works and do it on its behalf. These private contractors form the capillary network. They take the blood (money) from the government and carry out the work assigned to them by the government. They bid their rates and the government selects the best bid and finalizes a deal with them.
The Wounded Organs
When the body is wounded blood supply is directed by medical intervention to those areas so that they recover as financial life and function normally. In a financial crisis, the government plays the role of the doctor who tries to heal the wound by treating it and diverting resources towards it. Money is directed towards those areas that are badly hit by the economic crisis. One such effort in the recent times is the Recovery and Reinvestment Act of 2009 of Obama that involves the investment of $787 billion in the recovery project. Today, as the automotive industry seems to be the worst hit, Obama came up with the Cash for Clunkers program that is intended to generate money for that sector. $50 billion has been put in the home foreclosure prevention project to enable homeowners from getting their properties foreclosed. $ 40 billion is allocated for monetary aids to unemployed, and $ 3.5 billion for job training. $125 million is allocated for subsidies. Similarly, other funds are diverted for other work.
This is how the economic circulatory system works!