Here's an article. H/T to Mohican at Financial Planning/Personal Sanity... who has a great rant today by the way...
Take this key paragraph:
This is the precise point of entry for the new money that the Fed creates out of thin air. To repeat: When the Fed buys (say) $1 million in bonds from Bank XYZ, Bank XYZ surrenders ownership of the bonds but sees that its deposits of reserves at the Fed go up by $1 million. But the Fed didn't transfer this money from some other account. No, it simply increased the electronic entry representing Bank XYZ's total reserves on deposit. There is no offsetting debit anywhere in the banking system. Bank XYZ now has $1 million more in reserves, while no other bank has less. Bank XYZ is now free to go out and loan more reserves to other banks, or to make loans to its own customers. (In fact, due to the fractional-reserve system, the bank could make up to $10 million in new loans to customers.) The money supply has increased, putting upward pressure on prices measured in dollars.If you think this problem is isolated to the US, think again. Over the last few weeks, and quietly over the last few days, the Bank of Canada has been doing much the same thing in Canada. Billions, I say that again, Billions of dollars have been DUMPED into the overnight financial system in order to defend the key overnight interest rate. What does this mean? If the BoC had not printed money, it would of either triggered a catastrophic financial event that would send the markets reeling or it would have had to lower the interest rate and increase inflation.
This underhanded move--quietly dumping cash into the system to keep lenders liquid--has the same effect, without the psychological ramifications of an interest rate drop. Look out. The BoC using the CPI has turned steak into hamburger, lobster into prawns, SUV's into sub-compacts, and chicken into tofu. This has had the effect of artificially driving inflation rates down. Inflation is high. Much higher than you and I would like to admit. This has huge economic ramifications. Do your homework. And then teach the rest of us here at HHV.