If there are too many tickets outstanding for what the economy can do at once, the tickets bid up prices against each other, and prices rise.
If there are too few tickets outstanding for what the economy can do at once, pieces of the economy go idle for want of able buyers.
The Federal Reserve regulates the number of tickets by creating or destroying them, so that the number of tickets is matched to the capabilities of the economy.
The Fed meets every month or so and decides whether there are too many or too few tickets out there.
If there are too many, it sells Treasury debt for dollars, and burns the dollars.
If there are too few, it prints new dollars and uses them to buy back Treasury debt.
It is not creating or destroying wealth when it does this. It's just putting out or taking back tickets.
Clever detail:
The way the Fed controls its intervention is through the interest rate target.
The interest rate is an output from the economy. The Fed uses it to regulate itself.
The Fed, if it wants to destroy dollars, moves its target interest rate up a tiny bit. Then, for a month or so, it sells debt when the interest rate below its target, and buys debt when its interest rate is above its target.
The result is slightly fewer dollars out there relative to what the economy is capable of doing than before.
The market is producing the interest rate, not the Fed. The Fed just sets the target.
To increase the number of dollars, the Fed lowers the target instead of raising it.
Technical Detail:
The Fed uses leading indicators of inflation to decide whether there are too few or too many dollars out there.
The leading indicators have to be orthogonal to (=insensitive to) the interest rate, lest the Fed blind itself with its own action.
In today's (2012) environment, the Fed has pretty much thrown everything to the wind and is operating blind, doing monetary policy to try to fix a perverse and deadly economic policy.
Implications:
There can be no trust fund for Social Security. The government must instantly put back in circulation every dollar it takes in, lest the money supply fall. Tomorrow's retirees will be paid by tomorrow's workers when tomorrow comes.
Money in a mattress is a gift to the treasury. The Fed simply replaces it until such time as you take it out of the mattress and spend it. Then the Fed burns its copy.
Money overseas is a gift to the treasury as well, until such time as it's spent in the US economy either as purchase or investment.
Handing out free money to citizens will automatically be offset by issuing debt, to soak up an equal number of dollars from the economy and put them out of circulation. Otherwise too many tickets chase the available goods.
