Is there one in ten thousand of the millions of people who sit at desks all day long from sea to shining sea who have a clue how this works? Or what its relationship is to the real world?
I confess, my understanding of it is incomplete and schematic at best — in the way that my understanding of a Las Vegas magic act might be. All the flash and dazzle conceals the magician's misdirection. The magician is either a scary supernatural being or a magnificent fraud. Anyway, the audience 'out there' for the Federal Reserve's magic act — x-million people preoccupied by their futures slipping away, their cars falling apart, their kid's $53,000 college loan burden, or the $6,000 bill they just received for going to the emergency room with a cut finger — wouldn't give a good goddamn even if they knew the Fed's magic show was going on.
So, the Fed has this thing called a balance sheet, which is actually a computer file, filled with entries that denote securities that it holds. These securities, mostly US government bonds of various categories and bundles of mortgages wrangled together by the mysterious government-sponsored entity called Freddie Mac, represent about $4.5 trillion in debt. They're IOUs that supposedly pay interest for a set number of years. When that term of years expires, the Fed gets back the money it loaned, which is called the principal. Ahhhh, here's the cute part!