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When people say the Federal Reserve "prints money," they mean it's adding credit to its member banks' deposits. Federal Open Market Committee (FOMC) is the Fed

by xupybd 5y ago

When people say the Federal Reserve "prints money," they mean it's adding credit to its member banks' deposits. Federal Open Market Committee (FOMC) is the Fed’s operational arm, guiding monetary policy. It engages in expansive monetary policy when the Fed expands credit. It increases the money supply available to borrow, spend, or invest. Expanding credit helps to end recession Edit: Sorry please ignore me. I didn't know enough to understand the comment I was replying to.

avianlyric 5y ago
OP is talking about the printing of M1 money specifically. Which is the creation of physical note, cheques and couple of other things. But basically it’s a measure of cash. You can look at the M1 supply in isolation because most money doesn’t exist in M1 because it doesn’t earn any interest. If you look at the M2 money supply, which is a superset including M1 cash, then you see there has been very little change. The reasonable conclusion then is the people have been withdrawing money from banks into cash, and liquidating other assets. So the total amount of money hasn’t increased, it’s just the amount of physical dollar bills that has increased, as digital money becomes physical. So GP has a good reason to be annoyed. OP has cast as interest, but otherwise inconsequential (from the perspective of inflation) fact as being the sole explanation of changes in inflation.
- xupybd 5y ago
  Okay, I'm out of my league here.
- tudorconstantin 5y ago
  According to this chart, "only" 22.5% of the M2 circulating USD supply wass created since the start of 2020: https://tradingeconomics.com/united-states/money-supply-m2#:~:text=Looking%20forward%2C%20we%20estimate%20Money,according%20to%20our%20econometric%20models https://tradingeconomics.com/united-states/money-supply-m2#:....
- thereare5lights 5y ago
  > So the total amount of money hasn’t increased, it’s just the amount of physical dollar bills that has increased, as digital money becomes physical. Isn't this just splitting hairs? The amount of money actually circulating has increased then. Money that was previously just sitting in the bank, not circulating in the economy now is. Doesn't that have an impact on inflation? It might not be the sole explanation, but given the jump from 6.75 trillion to 18.4 trillion from Jan 2021 to Feb 2021 in the M1 money supply, it would seem odd if there wasn't any. And the salient point of GP was that this isn't even being discussed.
- Vadoff 5y ago
  M2 has grown at an average of 8.365% over the past 10 years, 7.063% over the past 20, 6.436% over the past 40, and 7.145% over the past 60. M2 is a much better gauge of inflation than the CPI (unless you're poor). At 7% inflation, holding USD means your value will decrease by nearly half every 10 years.
- james1071 5y ago
  No, 'printing money' does not mean physically printing banknotes.
BelenusMordred 5y ago
The graph: https://tradingeconomics.com/united-states/money-supply-m1 https://tradingeconomics.com/united-states/money-supply-m1
rsj_hn 5y ago
> adding credit to its member banks' deposits. The Fed does not just add credits. It buys Treasuries on the open market in exchange for reserves. It is a balance sheet portfolio shift that leaves the assets of the private sector unchanged. Now the question is, why would this operation "help extend credit". Banks would rather have the treasuries. Indeed the only thing that affects private credit expansion is interest rates. Lower interest rates is what encourages private credit expansion and higher rates inhibit it. That is all that matters -- not monetary aggregates, but interest rates. So why does the Fed do open market operations in which reserves are exchanged for treasuries? Three reasons, but they boil down to basic plumbing to keep the financial sector going. It's like adding oil to your car: 1. To satisfy financial sector demand for reserves, as we have an antiquated system in which banks need to lend reserves to each other as opposed to a more modern zero-reserve system (corridor). Many factors determine the financial sector demand for reserves, but whatever that demand happens to be, the Fed must meet it or there will be a liquidity crisis and banks will go bust. Thus there isn't much choice, if banks need a hundred million more of reserves, then that's what the Fed gives them. OTOH, if the Fed gives them too many reserves, then as banks will want to lend excess reserves in the overnight market, the overnight interest rate will fall to zero, as banks in aggregate are as unable to rid themselves of excess reserves. It's like a game of hot potato, if in aggregate the financial system needs 1 billion in reserves, but the Fed adds 1.1 billion, there will always be a bank with an extra hundred million. Wanting to earn interest on that hundred million, it will loan it to another bank, which will loan it to another bank, etc until the overnight rate is 0%. So even a little excess of reserves and the rate falls to zero. Even a little insufficiency of reserves and some bank can't make its payments. Clearly this is a fragile system. This unnecessary complexity is why our system is antiquated and other central banks moved to a corridor system that requires no reserves at all. Reserves are just the oil that greases the engine and prevents it from seizing, they are not the gasoline that causes it to run faster. The gasoline is the interest rate. 2. To satisfy private sector demand for paper money. When individuals withdraw paper money, the banks need to purchase that paper money with reserves, which means that reserves need to be added. When individuals deposit money in a bank, those bills are shredded and converted into reserves. Thus banks swap reserves for currency in response to private sector currency demand. As that process of adding/subtracting reserves requires buying/selling treasures, it is also a swap of treasuries for cash. Once again, we see why the reserves are unnecessary intermediate steps and why other nations moved to corridor systems to get rid of these inter-bank overnight lending markets. 3. In the last round of QE, the Fed purchased a lot of reserves in an attempt to drive down long dated yields as overnight yields were already at zero. Thus banks now find themselves with excess reserves. We have seen in 1 that this means the overnight rate was zero, but now the Fed wants to raise the rate without unwinding all these positions. Thus to support a positive interest rate, we now pay interest on reserves, converting reserves into an effective treasury bill. As the reserves pay a positive interest, banks will not try to get rid of them for zero interest and so the overnight rate will be positive even if there are excess reserves. That truly makes the operation of swapping bills for reserves a NULL OP because now you are swapping two interest bearing assets for each other. None of this promotes or inhibits bank lending, it is just technical stuff to keep the plumbing working correctly in the inter-bank market. That's all reserves do. They are not a harbinger of hyperinflation. They are motor oil for our antiquated financial system. Economists did think that driving down long term yields via 3 would encourage lending, even though the amount that yields changed was miniscule and subject to a lot of debate, as longer term interest rates are the expected time path of short term rates, which are determined from the overnight rate, so you never know whether a long term rate falling is due to technical factors or to changes in the expected future overnight rates. Thus the ability of QE to drive down long term rates remains subject to interpretive ambiguities.

by xupybd 5y ago

avianlyric 5y ago

OP is talking about the printing of M1 money specifically. Which is the creation of physical note, cheques and couple of other things. But basically it’s a measure of cash. You can look at the M1 supply in isolation because most money doesn’t exist in M1 because it doesn’t earn any interest. If you look at the M2 money supply, which is a superset including M1 cash, then you see there has been very little change. The reasonable conclusion then is the people have been withdrawing money from banks into cash, and liquidating other assets. So the total amount of money hasn’t increased, it’s just the amount of physical dollar bills that has increased, as digital money becomes physical. So GP has a good reason to be annoyed. OP has cast as interest, but otherwise inconsequential (from the perspective of inflation) fact as being the sole explanation of changes in inflation.

xupybd 5y ago
Okay, I'm out of my league here.
tudorconstantin 5y ago
According to this chart, "only" 22.5% of the M2 circulating USD supply wass created since the start of 2020: https://tradingeconomics.com/united-states/money-supply-m2#:~:text=Looking%20forward%2C%20we%20estimate%20Money,according%20to%20our%20econometric%20models https://tradingeconomics.com/united-states/money-supply-m2#:....
thereare5lights 5y ago
> So the total amount of money hasn’t increased, it’s just the amount of physical dollar bills that has increased, as digital money becomes physical. Isn't this just splitting hairs? The amount of money actually circulating has increased then. Money that was previously just sitting in the bank, not circulating in the economy now is. Doesn't that have an impact on inflation? It might not be the sole explanation, but given the jump from 6.75 trillion to 18.4 trillion from Jan 2021 to Feb 2021 in the M1 money supply, it would seem odd if there wasn't any. And the salient point of GP was that this isn't even being discussed.
Vadoff 5y ago
M2 has grown at an average of 8.365% over the past 10 years, 7.063% over the past 20, 6.436% over the past 40, and 7.145% over the past 60. M2 is a much better gauge of inflation than the CPI (unless you're poor). At 7% inflation, holding USD means your value will decrease by nearly half every 10 years.
james1071 5y ago
No, 'printing money' does not mean physically printing banknotes.

BelenusMordred 5y ago

The graph: https://tradingeconomics.com/united-states/money-supply-m1 https://tradingeconomics.com/united-states/money-supply-m1

rsj_hn 5y ago

> adding credit to its member banks' deposits. The Fed does not just add credits. It buys Treasuries on the open market in exchange for reserves. It is a balance sheet portfolio shift that leaves the assets of the private sector unchanged. Now the question is, why would this operation "help extend credit". Banks would rather have the treasuries. Indeed the only thing that affects private credit expansion is interest rates. Lower interest rates is what encourages private credit expansion and higher rates inhibit it. That is all that matters -- not monetary aggregates, but interest rates. So why does the Fed do open market operations in which reserves are exchanged for treasuries? Three reasons, but they boil down to basic plumbing to keep the financial sector going. It's like adding oil to your car: 1. To satisfy financial sector demand for reserves, as we have an antiquated system in which banks need to lend reserves to each other as opposed to a more modern zero-reserve system (corridor). Many factors determine the financial sector demand for reserves, but whatever that demand happens to be, the Fed must meet it or there will be a liquidity crisis and banks will go bust. Thus there isn't much choice, if banks need a hundred million more of reserves, then that's what the Fed gives them. OTOH, if the Fed gives them too many reserves, then as banks will want to lend excess reserves in the overnight market, the overnight interest rate will fall to zero, as banks in aggregate are as unable to rid themselves of excess reserves. It's like a game of hot potato, if in aggregate the financial system needs 1 billion in reserves, but the Fed adds 1.1 billion, there will always be a bank with an extra hundred million. Wanting to earn interest on that hundred million, it will loan it to another bank, which will loan it to another bank, etc until the overnight rate is 0%. So even a little excess of reserves and the rate falls to zero. Even a little insufficiency of reserves and some bank can't make its payments. Clearly this is a fragile system. This unnecessary complexity is why our system is antiquated and other central banks moved to a corridor system that requires no reserves at all. Reserves are just the oil that greases the engine and prevents it from seizing, they are not the gasoline that causes it to run faster. The gasoline is the interest rate. 2. To satisfy private sector demand for paper money. When individuals withdraw paper money, the banks need to purchase that paper money with reserves, which means that reserves need to be added. When individuals deposit money in a bank, those bills are shredded and converted into reserves. Thus banks swap reserves for currency in response to private sector currency demand. As that process of adding/subtracting reserves requires buying/selling treasures, it is also a swap of treasuries for cash. Once again, we see why the reserves are unnecessary intermediate steps and why other nations moved to corridor systems to get rid of these inter-bank overnight lending markets. 3. In the last round of QE, the Fed purchased a lot of reserves in an attempt to drive down long dated yields as overnight yields were already at zero. Thus banks now find themselves with excess reserves. We have seen in 1 that this means the overnight rate was zero, but now the Fed wants to raise the rate without unwinding all these positions. Thus to support a positive interest rate, we now pay interest on reserves, converting reserves into an effective treasury bill. As the reserves pay a positive interest, banks will not try to get rid of them for zero interest and so the overnight rate will be positive even if there are excess reserves. That truly makes the operation of swapping bills for reserves a NULL OP because now you are swapping two interest bearing assets for each other. None of this promotes or inhibits bank lending, it is just technical stuff to keep the plumbing working correctly in the inter-bank market. That's all reserves do. They are not a harbinger of hyperinflation. They are motor oil for our antiquated financial system. Economists did think that driving down long term yields via 3 would encourage lending, even though the amount that yields changed was miniscule and subject to a lot of debate, as longer term interest rates are the expected time path of short term rates, which are determined from the overnight rate, so you never know whether a long term rate falling is due to technical factors or to changes in the expected future overnight rates. Thus the ability of QE to drive down long term rates remains subject to interpretive ambiguities.