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No, FED does not print money - bank reserves are not legal tender. If they had printed money, inflation would have skyrocket. My only question is why banks agr

No, FED does not print money - bank reserves are not legal tender. If they had printed money, inflation would have skyrocket. My only question is why banks agree to this deal: exchanging U.S. treasuries for bank reserves (which they only can use as a collateral for lending) ?

Qasaur 6y ago
Because they are pocketing the difference by arbitraging between the government (who issue the treasuries) and the Fed (who is the ultimate buyer) since the Fed cannot buy treasuries directly from the government. It's just a complicated way for the government to print money and hand it out and in this case banks are able to act as the middleman and earn money on the spread. It's a disgraceful system that is extremely morally questionable.
lambdasquirrel 6y ago
It's inflation through other means. You get asset price inflation instead of commodities / consumer goods inflation. It's a slow death rather than a quick one.
freeone3000 6y ago
Inflation (in the consumer goods sense) only happens when the value of money goes down for the average person. The price of lettuce isn't going to rise because the fed isn't buying lettuce with faerie money, they're buying securities. And the stock market has gone up and to the right, despite all logical indicators on the ground indicating it should go solidly opposite. Securities are hugely inflated.
- deleted 6y ago
  [deleted]
- jfengel 6y ago
  That turns out to be the answer I've been trying to figure out for years: regardless of the technicalities of "printing money", all this quantitative easing should have been causing inflation. And it is... in the stock market, which doesn't figure into the consumer price index. The CPI, meanwhile, has been stable, or even under the Fed's target. Presumably because those are basics, and you don't really need to buy much more of the basics just because you have more money. (The people with newfound stock wealth, that is; the people without it don't have any more money to spend in the first place.) It's still a little unclear to me why the S&P 500 has remained in the "inflated but not insane" through most of the past decade -- though for the past week or so it's trending back to "insane" (a P/E ratio well above 20). That means that earnings were coming from somewhere, and if not from core consumer products, then presumably from other things that the stock-market-wealthy were buying from each other, at presumably inflating prices, or at least quantities.
  - api 6y ago
    All the QE since 2007 has also caused massive inflation in real estate, and it's ongoing. Housing is actually rising in some markets in spite of record unemployment and a high risk of many mortgage defaults.
    - arcticbull 6y ago
      It's worth pointing out that housing costs are included in CPI (by proxy of rent). On an inflation adjusted dollars-per-square-foot basis, housing is exactly the same price as it was in the 1970s [1] -- right around $115/sqft in constant dollars. 2008 didn't actually make a big dent on average. The reason houses are more expensive today than they were in the past is that they're on average twice as big. This is due to city zoning ordinances, not inflation. Similarly house prices exploded in major metros like SF because of artificial supply constraints. The city won't allow new building -> refuses to allow smaller units -> prices go up. Again, not inflation. [1] https://fee.org/articles/new-homes-today-have-twice-the-square-feet-per-person-as-in-1973/ https://fee.org/articles/new-homes-today-have-twice-the-squa...
      - HarryHirsch 6y ago
        You could say that houses are twice as big because nowadays you have the dual-income family, and a family pays more for one house because the amount of money on the supply side has increased, so prices on the demand side have caught up. The fact that now there is twice as much enclosed space is immaterial, a family needs a house to live in.
        arcticbull 6y ago
        I suspect families were actually larger in the past than they are today, as evidenced by the rapidly declining fertility rate. In the 1970s there was an average of 2.48 births per woman, and today it's 1.77. My unsubstantiated opinion is that folks were willing to make do with less in the past, and again, city councils have forbidden building smaller buildings forcing the real costs up -- not through $/sqft but rather mandatory minimum sqft if you will.
- SonOfThePlower 6y ago
  FED buys MBSes and bonds. FED does not buy neither lettuce nor stocks.
  - claudeganon 6y ago
    The Fed has already been buying ETFs, which is about a hair’s breadth away from buying stocks. I don’t doubt that they’ll buy stocks to prop up investors if the current stimulus proves ineffective.
    - nkurz 6y ago
      Confirming story: https://www.marketwatch.com/story/the-fed-has-been-buying-etfs-what-does-it-mean-11600704182 https://www.marketwatch.com/story/the-fed-has-been-buying-et... The possibly essential caveat being that the ETF's being purchased are (as far as publicly known) all bond ETF's.
    - mrep 6y ago
      Barely. They are only buying corporate bonds and the sum total of "Includes non-marketable U.S. Treasury securities, supranationals, corporate bonds, asset-backed securities, and commercial paper at face value" is 85.274 billion or a max of 1.2% of their asset sheet [0]. [0]: https://www.federalreserve.gov/releases/h41/current/h41.htm https://www.federalreserve.gov/releases/h41/current/h41.htm
  - neffy 6y ago
    I'm sure their canteen buys lettuce, and as it happens they've been getting quite adventurous with what else they're prepared to buy recently.
    - SonOfThePlower 6y ago
      Well, lettuce has not been inflated by FED (yet), why would stocks have been?
  - dogman144 6y ago
    There are some rumors this happened at the bottom of the '07/'08 crashes. A few traders swear something held the bottom.
User23 6y ago
The Bureau of Printing and Engraving prints money, but Federal Reserve Notes are in fact a claim on bank reserves. It's just when you deposit them at your bank you don't get reserves, they instead create a bank deposit for you and a liability for them and then add the reserves you just gave them to THEIR account.
CyberDildonics 6y ago
https://fred.stlouisfed.org/series/M1REAL https://fred.stlouisfed.org/series/M1REAL

Qasaur 6y ago

Because they are pocketing the difference by arbitraging between the government (who issue the treasuries) and the Fed (who is the ultimate buyer) since the Fed cannot buy treasuries directly from the government. It's just a complicated way for the government to print money and hand it out and in this case banks are able to act as the middleman and earn money on the spread. It's a disgraceful system that is extremely morally questionable.

lambdasquirrel 6y ago

It's inflation through other means. You get asset price inflation instead of commodities / consumer goods inflation. It's a slow death rather than a quick one.

freeone3000 6y ago

Inflation (in the consumer goods sense) only happens when the value of money goes down for the average person. The price of lettuce isn't going to rise because the fed isn't buying lettuce with faerie money, they're buying securities. And the stock market has gone up and to the right, despite all logical indicators on the ground indicating it should go solidly opposite. Securities are hugely inflated.

deleted 6y ago
[deleted]
jfengel 6y ago
That turns out to be the answer I've been trying to figure out for years: regardless of the technicalities of "printing money", all this quantitative easing should have been causing inflation. And it is... in the stock market, which doesn't figure into the consumer price index. The CPI, meanwhile, has been stable, or even under the Fed's target. Presumably because those are basics, and you don't really need to buy much more of the basics just because you have more money. (The people with newfound stock wealth, that is; the people without it don't have any more money to spend in the first place.) It's still a little unclear to me why the S&P 500 has remained in the "inflated but not insane" through most of the past decade -- though for the past week or so it's trending back to "insane" (a P/E ratio well above 20). That means that earnings were coming from somewhere, and if not from core consumer products, then presumably from other things that the stock-market-wealthy were buying from each other, at presumably inflating prices, or at least quantities.
- api 6y ago
  All the QE since 2007 has also caused massive inflation in real estate, and it's ongoing. Housing is actually rising in some markets in spite of record unemployment and a high risk of many mortgage defaults.
  - arcticbull 6y ago
    It's worth pointing out that housing costs are included in CPI (by proxy of rent). On an inflation adjusted dollars-per-square-foot basis, housing is exactly the same price as it was in the 1970s [1] -- right around $115/sqft in constant dollars. 2008 didn't actually make a big dent on average. The reason houses are more expensive today than they were in the past is that they're on average twice as big. This is due to city zoning ordinances, not inflation. Similarly house prices exploded in major metros like SF because of artificial supply constraints. The city won't allow new building -> refuses to allow smaller units -> prices go up. Again, not inflation. [1] https://fee.org/articles/new-homes-today-have-twice-the-square-feet-per-person-as-in-1973/ https://fee.org/articles/new-homes-today-have-twice-the-squa...
    - HarryHirsch 6y ago
      You could say that houses are twice as big because nowadays you have the dual-income family, and a family pays more for one house because the amount of money on the supply side has increased, so prices on the demand side have caught up. The fact that now there is twice as much enclosed space is immaterial, a family needs a house to live in.
      - arcticbull 6y ago
        I suspect families were actually larger in the past than they are today, as evidenced by the rapidly declining fertility rate. In the 1970s there was an average of 2.48 births per woman, and today it's 1.77. My unsubstantiated opinion is that folks were willing to make do with less in the past, and again, city councils have forbidden building smaller buildings forcing the real costs up -- not through $/sqft but rather mandatory minimum sqft if you will.
SonOfThePlower 6y ago
FED buys MBSes and bonds. FED does not buy neither lettuce nor stocks.
- claudeganon 6y ago
  The Fed has already been buying ETFs, which is about a hair’s breadth away from buying stocks. I don’t doubt that they’ll buy stocks to prop up investors if the current stimulus proves ineffective.
  - nkurz 6y ago
    Confirming story: https://www.marketwatch.com/story/the-fed-has-been-buying-etfs-what-does-it-mean-11600704182 https://www.marketwatch.com/story/the-fed-has-been-buying-et... The possibly essential caveat being that the ETF's being purchased are (as far as publicly known) all bond ETF's.
  - mrep 6y ago
    Barely. They are only buying corporate bonds and the sum total of "Includes non-marketable U.S. Treasury securities, supranationals, corporate bonds, asset-backed securities, and commercial paper at face value" is 85.274 billion or a max of 1.2% of their asset sheet [0]. [0]: https://www.federalreserve.gov/releases/h41/current/h41.htm https://www.federalreserve.gov/releases/h41/current/h41.htm
- neffy 6y ago
  I'm sure their canteen buys lettuce, and as it happens they've been getting quite adventurous with what else they're prepared to buy recently.
  - SonOfThePlower 6y ago
    Well, lettuce has not been inflated by FED (yet), why would stocks have been?
- dogman144 6y ago
  There are some rumors this happened at the bottom of the '07/'08 crashes. A few traders swear something held the bottom.

User23 6y ago

The Bureau of Printing and Engraving prints money, but Federal Reserve Notes are in fact a claim on bank reserves. It's just when you deposit them at your bank you don't get reserves, they instead create a bank deposit for you and a liability for them and then add the reserves you just gave them to THEIR account.

CyberDildonics 6y ago

https://fred.stlouisfed.org/series/M1REAL https://fred.stlouisfed.org/series/M1REAL