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RISK POOLING: Combining the uncertainty of individuals into a calculable risk for large groups. For example, you may or may not contract the flu this year. However, if you're thrown in with 99,999 other people, then health-care types who spend their lives measuring the odds of an illness, can predict that 1 percent of the group, or 1,000 people, will get the flu. The uncertainty is that they probably don't know which 1,000 people, they only know the number afflicted. This little bit of information is what makes risk pooling possible. If the cost is $50 per illness, then an insurance company can insure your 100,000-member group against flu if they collect $50,000 ($50 x 1,000 sick people), or 50 cents per person. By agreeing to pay the cost of each sick person in exchange for the 50 cent payments, the insurance company has effectively pooled the risk of the group.

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EASY MONEY:

A general condition of the economy in which money is relatively abundant and plentiful. In modern times, this condition arises when the monetary authority (Federal Reserve System) undertakes expansionary monetary policy. With easy money, interest rates are generally lower, but inflation tends to creep higher. The alternative to easy money is tight money.
Easy money is a common term referring to an economy with a great deal of money in circulation. Money is, as such, easy to acquire. Unfortunately because money is easy to acquire it tends to be worth less, meaning commodity prices are higher and so too is inflation.

In historical times, when metals such as gold or silver were used as money, easy money resulted from the actual quantity of the metal available. However, in modern times, easy money results from monetary policy by the central banking authority. In the United States, the Federal Reserve System can pursue of course of easy money through expansionary monetary policy.

A Blast From The Past

Money, a medium of exchange used to facilitate exchanges, has been a part of human activity almost since the dawn of civilization. The earliest forms of money were commodities (animal skins, metals, precious stones) that had value in use as well as value in exchange. The quantity of commodity money in circulation was primarily dependent on market forces affecting the specific commodity.

For example, when beaver pelts were used as money in the colonial days of North America, a surge in the beaver population led to abundant beaver pelts and easy money. When gold was used as money in the United States during the 1800s, the discovery of a major new deposit, such as California in the 1840s and Alaska in the 1890s, led to a surge in the available quantity and easy money.

Modern Manipulation

In modern economies, fiat money with little or no value in use has replaced commodity money. The quantity of fiat money that a country has in circulation is under control of the monetary authority. In the United States, the Federal Reserve System (or the Fed) performs this task. The Fed can generate a condition of easy money for the United States through expansionary monetary policy.

Modern monetary policy makes use of three tools--open market operations, the discount rate, and reserve requirements. Expansionary monetary policy and easy money arises when the Fed uses these tools to increase the quantity of money available.

  • Open Market Operations: This occurs when the Fed buys and sells U.S. Treasury securities. Such buying and selling affects the amount of excess reserves that banks have available to make loans and to create money and is the primary monetary policy tool used by the Fed. Expansionary monetary policy and easy money result if the Fed buys Treasury securities. This provides banks with more reserves that they use to make more loans at lower interest rates, which increases the money supply.

  • Discount Rate: This is the interest rate that the Fed charges banks for borrowing reserves. Higher or lower rates affect the amount of excess reserves that banks have available to make loans and create money. Expansionary monetary policy and easy money result if the Fed lowers the discount rate. In this case, banks can borrow more reserves, which they can use to make more loans at lower interest rates, which then increases the money supply. Changes in the discount rate are most often used as a signal for monetary policy actions.

  • Reserve Requirements: These are the rules established by the Fed to regulate the amount of reserves that banks must keep to back outstanding deposits. Higher and lower reserve requirements affect the amount of deposits banks can create with a given amount of reserves. Expansionary monetary policy and easy money result if the Fed lowers reserve requirements. With this change banks can use existing reserves to make more loans and thus increase the money supply. This tool is seldom used as a means of controlling the money supply.

The Good, The Bad

Easy money is favored by some, but not by others. The reason for this difference of opinion is that easy money has pluses and minuses, it is good for some and bad for others.
  • The Good: On the positive side, easy money stimulates the economy. People are able to purchase more goods and services, which increases production and employment, and reduces the unemployment rate. More workers have jobs and those jobs pay higher wages. The economy is likely to be expanding and growing. With easy access to money, anyone in debt will find it easier to pay off loans.

  • The Bad: On the negative side, easy money induces higher prices and inflation. While this might be good for sellers, it is not so good for buyers. The value of the monetary unit declines as more monetary units circulate through the economy. This is particularly bad for people who own a lot of monetary units. In particular, anyone with a great deal of financial assets are hurt by easy money. This includes those on the lending side of a financial transaction. The payment received on a debt is worth less than the amount originally loaned.
Although the dividing line is not clear cut and it changes over time, those who favor and oppose easy money tend to fall into two relative separate groups.
  • The Winners: The beneficiaries of easy money are usually working class folks, with very little financial savings and a significant amount of financial debt. They are likely to benefit from an expanding economy, lower unemployment, and higher wages. They have little financial wealth hurt by inflation, but they find it easier to pay off outstanding debt. Historically, political liberals and Democrats have counted these sorts of folks among their constituency and thus tend to favor easy money when in power.

  • The Losers: Those hurt by easy money tend to be on the higher end of the income spectrum, with a great deal of financial wealth. With money more abundant, what they have is worth less. To the extent that they are also on the employer side of the labor market, then they have pay higher wages for labor. To the extent that they are net lenders, then loan repayments are worth less as well. Historically, political conservatives and Republicans have counted these sorts of folks among their constituency and thus tend to oppose easy money when in power.

The Tight Money Alternative

The alternative to easy money is tight money. Tight money is the general condition of the economy in which money is not relatively abundant nor plentiful. In modern times, this condition arises when the monetary authority undertakes contractionary monetary policy. With tight money, interest rates are generally higher, but inflation tends to remain low.

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Recommended Citation:

EASY MONEY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: July 29, 2014].


Check Out These Related Terms...

     | tight money | expansionary monetary policy | monetary economics | monetary policy | contractionary monetary policy | open market operations | discount rate | reserve requirements | central bank | Federal Reserve System | Federal Reserve pyramid | Board of Governors, Federal Reserve System | Chairman of the Board of Governors, Federal Reserve System | Federal Reserve Banks | Federal Open Market Committee | Federal Advisory Council |


Or For A Little Background...

     | fractional-reserve banking | banks | money | bank reserves | bank panic | business cycles | check clearing | money creation | macroeconomics | monetary base | monetary aggregates | unemployment | inflation | investment expenditures | consumption expenditures | macroeconomic goals | political views |


And For Further Study...

     | Federal Deposit Insurance Corporation | Comptroller of the Currency | barter | aggregate market | inflation | bank balance sheet | gross domestic product | circular flow | goldsmith money creation | fiscal policy | expansionary fiscal policy | contractionary fiscal policy |


Related Websites (Will Open in New Window)...

     | Federal Reserve System |


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