Grov, a good question. Put simply, it's the difference between...

Grov, a good question. Put simply, it's the difference between "temporary" and "permanent" open market operations and the difference between bluff and "Call" on the cards.

The reason why gold hasn't gone to $US5,000/oz, even though Heli Ben has shot the Fed's balance sheet through the roof during the past 12 months, is because he has mainly been using what economists believe are "temporary" operations. At least, that's what he says he's doing.

The quantitative easing strategy is something completely different. It is permanent open market operations - ie. they are buying for good. They won't be taking the money back. It hasn't had an effect just yet, because it's only just been announced - give it a couple of weeks.

This difference between temporary and permanent operations (which works nicely during "benign" periods) is why economists and scientists, alike, think the electronic monetary system is so fantastic. When you look at it as a creation of streamlined efficiency and fluency, it is truly a thing of beauty. Unfortunately, because it is computer-based, it's even easier to debase than paper, let alone a hard-money currency. [People forget how inventive rulers and governments are - even under gold standards, the Romans and medieval kingdoms found ways to debase their hard-money supply - it just took them a few decades/centuries longer!]

So, Grov, suspend your sense of reality for a bit and enter the surreal world of the "US Fed". In that world, there are two types of "money" - temporary and permanent money. And, in that world, the Fed is the ultimate Master of both.

The economists spin a sophisticated and varied web around each type of "money", however at the end of the day, the distinction is very simple: "temporary" paper money is essentially a loan from the State, which assists with the lubrication/liquidity of commerce in that country and which is for a defined period of time (eg. 1 day, 30 days, 6 months, etc.). When it's paid back, it is supposed to be extinguished - hence, it has enabled the authorities to temporarily expand, then shrink, the money supply without actually printing more paper notes or coins. Computers have made this process much more accessible for governments. In fact, we would not be where we are today, if we had not invented computers. (Don't think I'm blaming computers, though!)

Permanent open market operations are not a loan - they are an outright purchase. The current Bernanke Fed has indicated money creation without limit and without cessation, until he achieves his objective of getting lending "back on course".

Scared yet?