5 ms·

> While the Department of the Treasury prints actual dollars, “printing money” is also a term that is sometimes used to describe a means of monetary policy, whi

by aazaa 5y ago

> While the Department of the Treasury prints actual dollars, “printing money” is also a term that is sometimes used to describe a means of monetary policy, which is conducted by the Federal Reserve. Monetary policy involves controlling the supply of money and the cost of borrowing. The Federal Reserve uses monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates on the behalf of the Congress. The federal government uses fiscal policy, or the control of taxation and government spending, to promote economic activity. I can't help but think this is confusing as heck to most Americans. I'm not sure all of the quoted statements are true. Private banks create a good chunk of the new money that goes into circulation by issuing loans. The Federal government (through the Treasury) creates still more by issuing bonds to cover deficit spending. The Fed can influence the rate of money creation by setting short term rates. But the Fed can't force banks to loan money, so its power is limited. Especially so with short term rates pegged at zero for most of the last 13 years or so. Although some view the Fed's QE as a form of "money printing," it's not. It's an asset swap in which the Federal reserve buys a Treasury from a bank, issuing a reserve asset as a credit to the bank. Reserve assets thereby become "trapped" inside the banking system. They are not cash and can only be used under very restricted conditions (not unlike a laundry token) at least according to some sources.

tick_tock_tick 5y ago
> Private banks create a good chunk of the new money that goes into circulation by issuing loans. Even this is misleading private banks do not "create" money. They add to the supply but do not create. For every loan credit there is an equal loan debit. The total amount of money, the sum of all credits and debits, is the exact same.
- BobbyJo 5y ago
  > The total amount of money, the sum of all credits and debits, is the exact same. Can't banks lend something like 7X more money than they have in deposits?
  - lumost 5y ago
    That 7x that is lent will be deposited by the people it is spent on. The bank can then lend 7x that and keep fabricating money as long as there are people to profitably lend too. The rate of currency growth is then correlated to velocity for how fast it’s turned over from debt to deposit to debt minus the counter flow of debts being retired.
    - BobbyJo 5y ago
      Yes, but doesn't that strictly invalidate: > The total amount of money, the sum of all credits and debits, is the exact same ?
      - manwe150 5y ago
        The sum of all credits and debits is zero (by the double-entry accounting definition), so seems like this is tautologically true, though not very useful. The economic principle at work is you can have $1 in the bank and loan that to 7 people sequentially (who each redeposit it), or have $7 and loan it to those same people simultaneously (who each redeposit it), but in both cases the same transactions happened ($7 out and $7 in).
      - lumost 5y ago
        As the sibling noted, the order of borrowing and deposits does not matter. The summation will always be zero. This gets to the heart of why there can be negative dynamics in a credit cycle. If I’ve lent 1 real dollar 100 or 1000x then there is a real risk of everyone needs that dollar back today. Similarly if creditors become risk averse and stop redepositing the money into the banking system, the velocity of money will tank and the number of dollars available to lend/spend will collapse. Growing the money supply only through fractional reserve dynamics also poses risks if a systemic imbalance emerges between creditors and debtors requiring some individuals/corps to be permanent borrowers e.x the Great Depression, and Recession. In many ways the US is using treasuries to counterbalance the above by having the federal reserve purchase treasuries which will never be paid back in real dollars. However until the pandemic the government had limited ability to place those trillions of dollars in the hands of people who needed the surplus.
- lend000 5y ago
  As the other commenter implied, in a fractional reserve banking system (where banks lend any amount > 0, and are not just acting as vaults), banks do indeed create money [0]. Printed dollars are necessary in an amount proportional to economic activity, and the sum of printed dollars is only loosely related to the total money supply as it affects the macroeconomy (and is becoming less relevant every year). [0] https://en.wikipedia.org/wiki/Money_multiplier https://en.wikipedia.org/wiki/Money_multiplier
  - Gabriel_Martin 5y ago
    From your link, wouldn't: "the multiplier being the maximum amount of commercial bank money created by a given unit of central bank money" be interpreted to mean that as soon as central bank monetizes it's debt, i.e. the money is initially created, it inherently is equal to a certain amount of commercial bank money, as long as it doesn't remain unlent? So it's not really the new creation of money, but rather the realization of it's value, upon being lent by a bank?
    - lend000 5y ago
      I'm not sure if I'm interpreting you correctly, but I think the answer is no. It's best to think of it as the creation of new money, which cannot significantly be reversed. The way the Fed prints money is by buying Treasuries, which increases the money supply in two ways: 1. It allows the government to spend more money, which ends up going to a bunch of places that can't be "unspent" (government worker salaries, contractors, equipment, etc.). That money goes into various banks and ends up getting irreversibly multiplied. 2. In order to fill bids for Treasuries, the Fed front-runs other market participants with artificially low interest rates (below market), forcing other major Treasury participants (like banks) to lower their commercial interest rates in order to do something with their deposits, resulting in more borrowing. It should also be noted that the Fed sets the Fed Funds Rate, but my understanding is that this has a less pronounced effect. And it sets the minimum fractional reserve ratio, which as of COVID, is ZERO (infinite multiplier potential, although most big banks are pretty conservative with their reserves. Although IMO they do not need to be, since the odds of a run on the bank in an approaching-cashless society is nil).
- AnimalMuppet 5y ago
  Yes, but also no. Yes, a loan creates both a credit and a debit, and they offset exactly. In that sense, nothing is created. But the credit spends just like cash. The debit, on the other hand, does not spend like negative cash. So in the sense of the supply of money in circulation, bank loans create money.
  - manwe150 5y ago
    Wouldn’t this ‘negative cash’ be a regular financial instrument like a stock short, reverse mortgage, credit default swap, etc., which they actually can use, precisely because nothing is created by this process? It is just less liquid than hard cash, which can affect the perceived trade-able value (but that too is already factored in as expected interest).
- spiralx 5y ago
  The Bank of England disagrees with you, when a bank loans money it adds a figure to the creditors account (a liability) and adds an equivalent loan to its books (an asset). There's no transfer of funds from somewhere to somewhere else, that's a "common sense" concept that doesn't apply to fiat money, the same as "fractional reserve banking". https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
nojito 5y ago
Providing liquidity via loans does not mean private banks are creating money!
pphysch 5y ago
> Although some view the Fed's QE as a form of "money printing," it's not. It's an asset swap in which the Federal reserve buys a Treasury from a bank, issuing a reserve asset as a credit to the bank. Reserve assets thereby become "trapped" inside the banking system. They are not cash and can only be used under very restricted conditions (not unlike a laundry token) at least according to some sources. According to the lede of [1], "[Federal Reserve Deposits] are interchangeable with Federal Reserve Notes", i.e. cash. But you are claiming the opposite. Do you have a source? [1] - https://en.wikipedia.org/wiki/Federal_Reserve_Deposits https://en.wikipedia.org/wiki/Federal_Reserve_Deposits
- legolas2412 5y ago
  I think they have a weird definition of creating money. Because they did say "The Federal government (through the Treasury) creates still more by issuing bonds to cover deficit spending.". So, they imagine the treasury printing the money, while the bonds are actually an IOU. This is how I see it. Treasury makes new treasuries, and the Federal reserve buys them (through a bank, but it is a middle man only). Essentially, Federal reserve created money and loaned it to the government, holding the treasuries as IOU. This is further complicated as the Federal reserve is also mandated to give all profits to the treasury. So, essentially, the treasury did not create the money, only got a loan, but its loan payments are going to come back to itself. I personally find it easier to dispel with the illusion of an independent fed, and just say the government (which includes both fed and treasury) prints money.
  - jkhdigital 5y ago
    You’re missing a key detail: the Fed returns profits, but not loan principal. If the Fed keeps a T-bill until maturity and doesn’t roll it over, then the Treasury must actually pay the principal so the money is destroyed. It is only if the Fed actually cancels government debt that we could call it outright printing. When the base money is itself an IOU, then debt issued by the privileged party is indeed printing money, albeit money with an expiration date.
- thelamest 5y ago
jkhdigital 5y ago
> Although some view the Fed's QE as a form of "money printing," it's not. I think you’re technically right; I would only call it outright printing if the Fed actually canceled the debt rather than rolling it over.

by aazaa 5y ago

tick_tock_tick 5y ago

> Private banks create a good chunk of the new money that goes into circulation by issuing loans. Even this is misleading private banks do not "create" money. They add to the supply but do not create. For every loan credit there is an equal loan debit. The total amount of money, the sum of all credits and debits, is the exact same.

BobbyJo 5y ago
> The total amount of money, the sum of all credits and debits, is the exact same. Can't banks lend something like 7X more money than they have in deposits?
- lumost 5y ago
  That 7x that is lent will be deposited by the people it is spent on. The bank can then lend 7x that and keep fabricating money as long as there are people to profitably lend too. The rate of currency growth is then correlated to velocity for how fast it’s turned over from debt to deposit to debt minus the counter flow of debts being retired.
  - BobbyJo 5y ago
    Yes, but doesn't that strictly invalidate: > The total amount of money, the sum of all credits and debits, is the exact same ?
    - manwe150 5y ago
      The sum of all credits and debits is zero (by the double-entry accounting definition), so seems like this is tautologically true, though not very useful. The economic principle at work is you can have $1 in the bank and loan that to 7 people sequentially (who each redeposit it), or have $7 and loan it to those same people simultaneously (who each redeposit it), but in both cases the same transactions happened ($7 out and $7 in).
    - lumost 5y ago
      As the sibling noted, the order of borrowing and deposits does not matter. The summation will always be zero. This gets to the heart of why there can be negative dynamics in a credit cycle. If I’ve lent 1 real dollar 100 or 1000x then there is a real risk of everyone needs that dollar back today. Similarly if creditors become risk averse and stop redepositing the money into the banking system, the velocity of money will tank and the number of dollars available to lend/spend will collapse. Growing the money supply only through fractional reserve dynamics also poses risks if a systemic imbalance emerges between creditors and debtors requiring some individuals/corps to be permanent borrowers e.x the Great Depression, and Recession. In many ways the US is using treasuries to counterbalance the above by having the federal reserve purchase treasuries which will never be paid back in real dollars. However until the pandemic the government had limited ability to place those trillions of dollars in the hands of people who needed the surplus.
lend000 5y ago
As the other commenter implied, in a fractional reserve banking system (where banks lend any amount > 0, and are not just acting as vaults), banks do indeed create money [0]. Printed dollars are necessary in an amount proportional to economic activity, and the sum of printed dollars is only loosely related to the total money supply as it affects the macroeconomy (and is becoming less relevant every year). [0] https://en.wikipedia.org/wiki/Money_multiplier https://en.wikipedia.org/wiki/Money_multiplier
- Gabriel_Martin 5y ago
  From your link, wouldn't: "the multiplier being the maximum amount of commercial bank money created by a given unit of central bank money" be interpreted to mean that as soon as central bank monetizes it's debt, i.e. the money is initially created, it inherently is equal to a certain amount of commercial bank money, as long as it doesn't remain unlent? So it's not really the new creation of money, but rather the realization of it's value, upon being lent by a bank?
  - lend000 5y ago
    I'm not sure if I'm interpreting you correctly, but I think the answer is no. It's best to think of it as the creation of new money, which cannot significantly be reversed. The way the Fed prints money is by buying Treasuries, which increases the money supply in two ways: 1. It allows the government to spend more money, which ends up going to a bunch of places that can't be "unspent" (government worker salaries, contractors, equipment, etc.). That money goes into various banks and ends up getting irreversibly multiplied. 2. In order to fill bids for Treasuries, the Fed front-runs other market participants with artificially low interest rates (below market), forcing other major Treasury participants (like banks) to lower their commercial interest rates in order to do something with their deposits, resulting in more borrowing. It should also be noted that the Fed sets the Fed Funds Rate, but my understanding is that this has a less pronounced effect. And it sets the minimum fractional reserve ratio, which as of COVID, is ZERO (infinite multiplier potential, although most big banks are pretty conservative with their reserves. Although IMO they do not need to be, since the odds of a run on the bank in an approaching-cashless society is nil).
AnimalMuppet 5y ago
Yes, but also no. Yes, a loan creates both a credit and a debit, and they offset exactly. In that sense, nothing is created. But the credit spends just like cash. The debit, on the other hand, does not spend like negative cash. So in the sense of the supply of money in circulation, bank loans create money.
- manwe150 5y ago
  Wouldn’t this ‘negative cash’ be a regular financial instrument like a stock short, reverse mortgage, credit default swap, etc., which they actually can use, precisely because nothing is created by this process? It is just less liquid than hard cash, which can affect the perceived trade-able value (but that too is already factored in as expected interest).
spiralx 5y ago
The Bank of England disagrees with you, when a bank loans money it adds a figure to the creditors account (a liability) and adds an equivalent loan to its books (an asset). There's no transfer of funds from somewhere to somewhere else, that's a "common sense" concept that doesn't apply to fiat money, the same as "fractional reserve banking". https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

nojito 5y ago

Providing liquidity via loans does not mean private banks are creating money!

pphysch 5y ago

> Although some view the Fed's QE as a form of "money printing," it's not. It's an asset swap in which the Federal reserve buys a Treasury from a bank, issuing a reserve asset as a credit to the bank. Reserve assets thereby become "trapped" inside the banking system. They are not cash and can only be used under very restricted conditions (not unlike a laundry token) at least according to some sources. According to the lede of [1], "[Federal Reserve Deposits] are interchangeable with Federal Reserve Notes", i.e. cash. But you are claiming the opposite. Do you have a source? [1] - https://en.wikipedia.org/wiki/Federal_Reserve_Deposits https://en.wikipedia.org/wiki/Federal_Reserve_Deposits

legolas2412 5y ago
I think they have a weird definition of creating money. Because they did say "The Federal government (through the Treasury) creates still more by issuing bonds to cover deficit spending.". So, they imagine the treasury printing the money, while the bonds are actually an IOU. This is how I see it. Treasury makes new treasuries, and the Federal reserve buys them (through a bank, but it is a middle man only). Essentially, Federal reserve created money and loaned it to the government, holding the treasuries as IOU. This is further complicated as the Federal reserve is also mandated to give all profits to the treasury. So, essentially, the treasury did not create the money, only got a loan, but its loan payments are going to come back to itself. I personally find it easier to dispel with the illusion of an independent fed, and just say the government (which includes both fed and treasury) prints money.
- jkhdigital 5y ago
  You’re missing a key detail: the Fed returns profits, but not loan principal. If the Fed keeps a T-bill until maturity and doesn’t roll it over, then the Treasury must actually pay the principal so the money is destroyed. It is only if the Fed actually cancels government debt that we could call it outright printing. When the base money is itself an IOU, then debt issued by the privileged party is indeed printing money, albeit money with an expiration date.
thelamest 5y ago

jkhdigital 5y ago

> Although some view the Fed's QE as a form of "money printing," it's not. I think you’re technically right; I would only call it outright printing if the Fed actually canceled the debt rather than rolling it over.