3 ms·

Noob question: What does that consist of (other than halting currency printing)?

arcticbull 5y ago
The Fed doesn't print currency - thats Treasury, although the Fed holds and distributes it to depository institutions! They control the money supply by reducing the fractional reserve lending rate at banks (reducing supply of loans), increasing interest rates (reducing demand for loans) and unwinding their balance sheet by selling back purchased assets (largely t-bills, reducing circulating supply directly). The money supply of centrally banked economies is mostly debt/demand driver, not supply driven. Money is created when lent, and destroyed when repaid. By tweaking parameters, the Fed is able to manage circulating supply. It's actually a really elegant system, IMO.
- temp20160423 5y ago
  The last sentence is only true if you believe the Fed will actually sell back the assets. When I look at this chart, https://fred.stlouisfed.org/series/WALCL https://fred.stlouisfed.org/series/WALCL, I have very little confidence that the Fed will sell a meaningful portion back (notice the Fed already gave up BEFORE covid when we supposedly had one of the best economies in recent times). In fact, it looks to me that the assets held by the Fed are growing exponentially and definitely growing faster than our productivity growth.
  - imtringued 5y ago
    2018 to 2019 was a 15% decrease of the Fed's balance sheet. That was actually quite a decent pace. At $0.6 trillion/year it would take 12 years to unwind the 2021 balance sheet. That's worrying but not impossible.
imtringued 5y ago
Paradoxically, the default state of fiat currency is deflation, because the primary means of money creation is debt. If inflation is 2% every year that means future debts must overshadow past debts. If you raise interest rates people stop borrowing money because it becomes too expensive. The interest rate itself acts as a productivity gate. "You must be this productive to obtain financing." If you stop borrowing money, then the only place for the money to go is to pay off debts, which contracts the money supply and you get deflation which is strong enough to counteract past inflation. The vast majority of dollars were "printed" this way.

The Fed doesn't print currency - thats Treasury, although the Fed holds and distributes it to depository institutions! They control the money supply by reducing the fractional reserve lending rate at banks (reducing supply of loans), increasing interest rates (reducing demand for loans) and unwinding their balance sheet by selling back purchased assets (largely t-bills, reducing circulating supply directly). The money supply of centrally banked economies is mostly debt/demand driver, not supply driven. Money is created when lent, and destroyed when repaid. By tweaking parameters, the Fed is able to manage circulating supply. It's actually a really elegant system, IMO.

temp20160423 5y ago
The last sentence is only true if you believe the Fed will actually sell back the assets. When I look at this chart, https://fred.stlouisfed.org/series/WALCL https://fred.stlouisfed.org/series/WALCL, I have very little confidence that the Fed will sell a meaningful portion back (notice the Fed already gave up BEFORE covid when we supposedly had one of the best economies in recent times). In fact, it looks to me that the assets held by the Fed are growing exponentially and definitely growing faster than our productivity growth.
- imtringued 5y ago
  2018 to 2019 was a 15% decrease of the Fed's balance sheet. That was actually quite a decent pace. At $0.6 trillion/year it would take 12 years to unwind the 2021 balance sheet. That's worrying but not impossible.

imtringued 5y ago

Paradoxically, the default state of fiat currency is deflation, because the primary means of money creation is debt. If inflation is 2% every year that means future debts must overshadow past debts. If you raise interest rates people stop borrowing money because it becomes too expensive. The interest rate itself acts as a productivity gate. "You must be this productive to obtain financing." If you stop borrowing money, then the only place for the money to go is to pay off debts, which contracts the money supply and you get deflation which is strong enough to counteract past inflation. The vast majority of dollars were "printed" this way.