Here we have a great little video that explains quantitative easing and the fed in really simple terms. Plus the explanation comes from cute animals with robot accents. Honestly, what could be better? (Caution: some swearing)
Get it now? I do and I had no clue what quantitative easing was after trying to read a couple of wordy and, probably intentionally, convoluted explanations. Thank goodness for cute animals with robot accents who understand the workings of the fed!
UPDATE: Check out this post at Ace of Spades HQ for some interesting debate on whether or not deflation is a good as this video suggests (Ace thinks its a bad thing). It seems to me that, like inflation, deflation is good for certain groups and bad for others. Basically, if the dollar becomes more valuable (deflation) then debt holders and those who are debt free win and debtors lose. The exact opposite is true if the dollar becomes less valuable (inflation) as debt holders and those who are debt free lose and debtors win.
As with most things stability is what should be preferred. The problem with both deflation and inflation is when it comes in large doses. With relative stability people and institutions can enter into contracts with one another with confidence. However, when you have high levels of either inflation or deflation people and institutions can't be confident in the terms of the contracts they've entered into.
For example if I get a $1000 loan from a bank at a fixed rate of 10% with no inflation or deflation over the time it takes for me to pay them back then I can expect to pay them $100 on top of what they gave me and they can expect to make $100. However, if the terms are the same but there is inflation of 10% then the bank basically makes no money at all and I, essentially, got the loan for free. Conversely, if the terms are the same but there is deflation of 10% then the bank makes $200 and I, essentially, pay twice as much as I agreed to.
This leaves us with the question of why the Fed seems to fear deflation so much and like inflation so much. The answer seems pretty simple to me... after all, inflation benefits the debtor and who is the largest debtor in the world?