MUST READ: THE FED DOES NOT “PRINT” MONEY
Courtesy of The Pragmatic Capitalist
Anyone who is a regular reader of the site is well aware of the fact that the Federal Reserve does not create net new financial assets (see here for details). They merely target reserves. Finally, this reality is gaining some traction. Via Alea:
In the US, the central bank doesn’t print
The Federal Reserve Banks distribute new currency for the U.S. Treasury Department, which prints it.
…
The Federal Reserve orders new currency from the Bureau of Engraving and Printing, which produces the appropriate denominations and ships them directly to the Reserve Banks. Each note costs about four cents to produce, though the cost varies slightly by denomination.
Virtually all of currency notes in use are Federal Reserve notes. Each Federal Reserve Bank is required by law to pledge collateral at least equal to the amount of currency it has issued into circulation. The bulk of the collateral pledged is in the form of U.S. Government securities and gold certificates owned by the Federal Reserve Banks.
This is a good start, but this expands on this notion:
“When the government “spends,” the Treasury disburses the funds by crediting bank accounts. Settlement involves transferring reserves from the Treasury’s account at the Fed to the recipient’s bank. The resulting increase in the recipient’s deposit account has no corresponding liability in the banking system. This creation is called “vertical,” or exogenous to the banking system. Since there is no corresponding liability in the banking system, this results in an increase of non-government net financial assets.
When banks create money by extending credit (loans create deposits), this occurs completely within the banking system and results in a liability for the bank (the deposit) and a corresponding asset (the loan). The customer has an asset (the deposit) and a corresponding liability (the loan). This nets to zero.”
This entire idea that QE is “money printing” is 100% factually incorrect (yet Bernanke has succeeded in herding investors nonetheless). This is why Ben Bernanke made the admittal that he did last night:
“Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher
inflation .”
He does not have the power to change the amount of money in the system if there is no demand for loans. This is why he knows he can’t create inflation. The Federal Reserve targets reserves which can influence the amount of money that banks lend, but in an environment where demand for loans is low there is no reason to be concerned that the Fed is “printing money”.
