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Ask HN: “government is printing money” - what does it mean in practice?

34 points by rmbyrro 4y ago

Is there a book (or any source) where I could understand the mechanics of quantitative easing? (the practice, not theory) I understand that the government is not literally printing money. But it's creating it somewhere, somehow. Where and how? This money has to go from public to private hands. Which private hands are receiving it? Do they get it "for free"?

dpicco 4y ago
groffee 4y ago
Basically the Fed (a privately owned institution) print money out of literal 'thin air', then lend it at interest to the US Government and banks etc. Which in practice means there's literally never enough money in circulation to pay off the 'debt'. The IMF is an extension of that, they lend money to countries, then siphon off that countries assets in return. Look up the Federal Reserve Act 1913 also. "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." - Henry Ford
- dragonwriter 4y ago
  > Basically the Fed (a privately owned institution) The Fed overall has a weird hybrid public/private hybrid structure, but the monetary policy decision-making part, the Federal Reserve Board of Governors, is a bog-standard “indepedent within the executive branch” federal agency just like the FCC, FTC, etc.
  - dmfdmf 4y ago
    The best description I have read is that the Fed is a govt sanctioned monopoly on check kiting. As you say, it is a hybrid and they split the "profits".
- zugi 4y ago
  > Which in practice means there's literally never enough money in circulation to pay off the 'debt'. I always wondered why so many people were in so much debt, and was really shocked when I came to the understanding that we've designed our monetary system to trap people in debt. https://youtube.com/watch?v=2nBPN-MKefA https://youtube.com/watch?v=2nBPN-MKefA is a cartoonish but thorough explanation for anyone who has the time. This system really is insane. I mean, I thought Bitcoin was dumb because it's based on nothing, but our national government-based monetary systems being based on debt are even worse.
  - nine_zeros 4y ago
    I struggled for years as a non-economics person to understand how money is produced and if there is a fixed supply of money, how can interest ever be paid. Going down that rabbit hole is so insightful. We are all stuck in a debt based system. The only way to pay off debts is to print more money and create even more debt. That's all there is. There is no way to eliminate all the debt+interest. None.
    - Delk 4y ago
      By the time you get into any depth in that rabbit hole, the question really starts being about what money actually is. In the end, money is just some kind of an abstract quantity that we collectively believe and agree can be used for obtaining something directly useful or desirable later. Its value is based on that mutual understanding and belief. As long as the economy isn't a zero-sum game, thinking of money that way makes debt (and interest) actually kind of make sense without having to turn it solely into a vicious circle of more debt to pay off the interest. If the real economy keeps growing and those abstract resources borrowed from someone else (debt) can be used for investment that allows for creating added real value (or decreasing real costs), that added value can be used for offsetting the interest. The entire arrangement may still require "printing" more money and creating more debt but that's not necessarily the only thing that's happening. The real value that can be obtained with that increased amount of money in circulation also increases as long as the real economy also grows. It kind of does seem to make it a requirement that the real economy actually keeps growing, though. Or, at least that's how it looks to me as a layman.
- rmbyrro 4y ago
  Thanks for pointing out the 1913 Act ;)
chiefalchemist 4y ago
I would recommend Ron Paul's "End The Fed." I'm sure there are other books but Paul keeps it straight and to the point. Quick but important read. https://en.m.wikipedia.org/wiki/End_the_Fed https://en.m.wikipedia.org/wiki/End_the_Fed
- formerkrogemp 4y ago
  I wouldn't recommend wasting your time with Ron Paul's book. Now, I'm not defending the Fed, but his arguments aren't much more than invective, polemic, and empty, idealistic rhetoric. You might be better off reading: The Historical Performance of the Federal Reserve: The Importance of Rules. Mankiw's textbook on economics has a nice explanation as well.
  - chiefalchemist 4y ago
    > The Historical Performance of the Federal Reserve: Um. Close to 650 pages?!! Not saying it's not worth it. But Paul's book is a much easier start. If you want someone to run an ultra-marathon, first start with getting them to finish a 5k. https://www.amazon.com/Historical-Performance-Federal-Reserve-Importance/dp/0817922148 https://www.amazon.com/Historical-Performance-Federal-Reserv...
  - rmbyrro 4y ago
    Thank you for the book suggestion!
- rmbyrro 4y ago
  Hey, thanks a lot for pointing out this book!
system2 4y ago
55 minutes but worth watching. About US dollar's history and what happened in 70's. https://www.youtube.com/watch?v=UowzxWxlKJU https://www.youtube.com/watch?v=UowzxWxlKJU
deleted 4y ago
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injb 4y ago
Central Banking 101 by Joseph Wang (aka The Fed Guy: https://fedguy.com/ https://fedguy.com/)
jollyllama 4y ago
Say you buy a house for $500,000 with $100,000 down. The bank takes your $100,000 and writes a check to the seller for $500,000. The $400,000 has been created ex-nihilo by the bank. Loans for houses, properties, businesses, etc. which function in this way are how most of the money in existence today has been created.
- deleted 4y ago
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- quickthrowman 4y ago
  You forgot to mention that the bank has $100,000 cash and a debt instrument (asset) that is worth more than $400,000 on its balance sheet after writing the $500,000 check to the seller. Also, the question was ‘How does the government print money?’ and not ‘How does a bank lend money?’
  - jollyllama 4y ago
    >You forgot to mention that the bank has $100,000 cash That much seemed obvious; of course they have the money you paid them. >and a debt instrument (asset) that is worth more than $400,000 on its balance sheet Yes, the buyer is now in their debt; this is of course why they do it. They give money now for money later. None of that changes the fact that the money still came out of the ether. >Also, the question was ‘How does the government print money?’ and not ‘How does a bank lend money?’ The topic is germane to the topic of monetary creation. Ultimately, the creation of debt is the creation of money and the destruction of debt is the destruction of money.
- quickthrower2 4y ago
  $400k and also -$400k is created ex-nihilo by the bank, balancing to $0. If the bank just created $400k and you paid it back and it made $400k profit plus interest for printing that money, then they would be much more aggresive in giving you a mortgage, in fact you would see negative interest rate loans, because if they give you the $400k from thin air, and you only pay back $40k real money, they still make $40k profit! Hell they would probably just go around buying houses from other banks in circles in a scheme a bit like modern web3 defi wrapping all sorts of coins and reselling them.
anm89 4y ago
The real answer is that the meaning of this phrase "printing money" is unbelievably more complicated in the modern world than people understand. There really is not a thing called "a dollar". It's better to think of the dollar is a complicated engineered system. "Printing money" frequently means tweaking some subsystem of that system to move liquidity to specific places. That may sound like semantics but those types of money can only be used in specific ways and aren't convertible into each other. One thing Jeff Snider talks about (who is someone I find to have interesting thoughts on this topic but isn't beginner friendly, and also puts out some low quality content) is that people are focused on the quantitative expansion of money but that over the last 30 years, the potentially more interesting story is the qualitative expansion of money, IE we have invented a huge amount of subtly different new types of "money" all of which have different effects on the system and none of which are easily understandable by the average person. He argues that the central banks no longer really understand this system either, that large banks probably have the best current understanding but that really no one party fully understands it, kind of like how no single person understands every detail of a modern smartphone. Some of the basic categories here are 1) Understanding the differences between base money and non base money 2) various repo market products and other types of "interbank liabilities" 2a) the various Fed facilities which moderate liquidity in these markets 3) All the other Fed Facillities, especially things like Foreign Central Bank liquidity swaps which is really another totally different category of money https://www.newyorkfed.org/markets/desk-operations/central-bank-liquidity-swap-operations https://www.newyorkfed.org/markets/desk-operations/central-b... 4) Offshore dollar markets (eurodollar markets) and their dollar repo markets 5) And then QE (which simply means buying the long end of the bond market as opposed to short end which was traditionally just called Open market operations, but also happens in bigger volumes than OMO) As someone else mentioned, Joseph Wang's book could be a good starting point Here is a really interesting talk on some of these topics: https://youtu.be/itTpI_-OcPc?t=962 https://youtu.be/itTpI_-OcPc?t=962
adamdecaf 4y ago
The Fed simply "marks up the size of the account" in the computer. https://www.youtube.com/watch?v=hiCs_YHlKSI https://www.youtube.com/watch?v=hiCs_YHlKSI
rank0 4y ago
Here’s how it happens: 1. The annual congressional budget has a massive deficit every year. Our government is currently ~30T in debt. 2. In order to make up the difference between tax revenue and spending, the treasury sells bonds. 3. The country’s central bank AKA federal reserve buys those bonds, crediting the treasury without any “buyer side debit”. This part is confusing and where the printing happens. The fed adds treasury bonds to its balance sheet WITHOUT actually “spending” any money. 4. The treasury receives cash on its balance sheet. TLDR: The fed expands the money supply to buy treasuries so congress can fund its expenses. The fed has about ~9T in treasuries and MBS on its balance sheet last I checked.
- scotty79 4y ago
  Can FED refuse to "buy" new tresury bonds? Or can the government supply itself with any amount of money at will using this procedure?
  - rank0 4y ago
    Yup! They operate independently and congress has no authority over Fed actions. Although the President does appoint the chairman. Most of the time nobody wants to rock the boat…so for example both Trump and Biden selected Powell as the current chairman.
thoughtstheseus 4y ago
Quantitative easing is when the Federal Reserve buys U.S. treasuries with bank reserves. Both U.S. treasuries and bank reserves are “money”, just different types. Anyone can hold u.s. treasuries but only banks can hold reserves. Banks are highly regulated in how they can spend their money and the assets they need to hold. Hence- stuffing banks full of reserves does not hit the real economy. They can’t spend it. When the government issues debt they are creating new money. Debt = money. More debt = more money. This is why banks are regulated, they create debt(money). The inverse here is taxes. Taxes take money OUT of the economy. More taxes = less money.
- airza 4y ago
  Taxes don’t just go into a black hole though. They are used to pay people who work for the government or who sell things to the government.
  - xyzzy123 4y ago
    Hypothetically, you can imagine the government setting all tax income on fire and just printing new money to do the stuff it wants (however much they need). It's valid to argue that dollars are fungible and it's all how you choose to account it, and that's my point. They don't need you to pay them taxes to get schools and roads, but there does need to be enough productive capacity available in the economy to supply those things, and the government needs to be able to command their production without causing major problems. Paying say, 40% tax "sort of" reserves 40% of production for government use, but it's complicated.
    - landemva 4y ago
      In USA, roads are funded by tax on fuel collected by the fuel filling stations. Income taxes are not the road taxes. https://www.whitehouse.gov/briefing-room/statements-releases/2022/06/22/fact-sheet-president-biden-calls-for-a-three-month-federal-gas-tax-holiday/ https://www.whitehouse.gov/briefing-room/statements-releases...
  - ShivShankaran 4y ago
wbsss4412 4y ago
1. The fed makes loans to member banks, this money isn’t backed by deposits like it would be at a traditional bank. The fed “raising rates” refers to the interest it charges on these loans. 2. The fed makes asset purchases on the open market. Of late, these have been two types of assets: US treasuries, and mortgage backed securities. It pays for these with cash and adds them to the balance sheet, said cash was “printed”. The fed is currently in the process of selling (some of) these assets back onto the market and “destroying” said cash. All of that is represented as the “M1” money supply. M1 is dwarfed by the M2 supply, which is made up of the M1 supply as well as the money created when banks make loans backed by their own balance sheets.
- rmbyrro 4y ago
  That's clarifying, thanks! When Congress approves an increase of the debt, I presume it's actually allowing the issuing of more treasury bonds, is that correct? Does the FED have any hard/legal limit to its "printing"? Can it just print and buy stuff like mortgage-backed securities out of the blue? Or does it always require Congress approval, for example, as the executive branch needs to issue debt?
  - wbsss4412 4y ago
    > When Congress approves an increase of the debt, I presume it's actually allowing the issuing of more treasury bonds, is that correct? Congress approves budgets, and when the budget has a deficit it implicitly requires the issuance of debt to cover its expenses. There technically exists a “debt ceiling” by law that they created at some point in the past (I’m not familiar with the exact history) but it’s not there as a requirement and has always been raised when the debt has hit the pre existing limit. > Does the FED have any hard/legal limit to its "printing"? Can it just print and buy stuff like mortgage-backed securities out of the blue? Or does it always require Congress approval, for example, as the executive branch needs to issue debt? So, to start, the executive doesn’t require congressional approval to issue debt exactly, it’s more so that it’s acting on congresses allocated budget. The fed doesn’t have any limit in place as of not in money printing, but it is supposed to follow its mandates set by congress: maintaining low unemployment and price stability. It has been granted it’s power by congress, so congress does have the power to change this at any time, but it is generally recognized that “central bank independence” is a good thing, because it’s too tempting for politicians to print their way out of budgetary deficits.
contingencies 4y ago
Disclaimer: I am not an economist. In modern economies money is created in many places. The most discussed means is through loans to banks from the central bank ("the Fed"). This money is lent to the banks at the current federal interest rate and is "free" in the immediate term but "unfree" in the long term as they must pay interest. Roughly speaking, if you can convince a bank that, should you borrow that money you will certainly generate more, and return it at a faster rate than the bank has to pay, then they will seek to lend you money. For most individuals, this is housing debt (a mortgage) and personal consumer credit (credit cards, car payments, other forms of purchasing in installments, etc.). Companies have access to roughly equivalent and often larger and more attractive forms of credit such as business loans, equipment financing, and so on. Printed money is such a small portion of the economy that it is statistically mostly irrelevant. Other acts of government can also create money by generating government debt and obligations. However, that is not the whole story. Separately to the banking sector, a whole lot of money is "created" when people ascribe value to things. For example in venture capital, if I were to create a company purely with hard work and loose change and you were to buy in to it because it's the next greatest thing and is clearly going places, let's say you buy 1% for $1M at a pre-money valuation of $100M then you've sort of voted in to existence $99M of the $100M that you didn't buy by saying that valuation has enough legitimacy for you to put down $1M. While that value is not liquid, and is not really "money" per-se until it becomes so, it's been "created" just the same. If I create shares on public markets, art, or iconic architecture, or an NFT, it is the same process. Ultimately the value of these things is curtailed by the market's willingness to purchase them, which is often not directed purely by demand for the supply but by other concerns (irrationality such as FOMO or fads, money laundering, fear of regulators, devaluation of currencies, otherwise illiquid capital, etc.). In Switzerland they have WIR, an interesting mutual credit clearing association for companies which allows them to purchase from one another without immediate settlement, on the understanding that they will settle in time. Such mechanisms are also effectively creating liquidity (==money) by agreeing to hold debt on their books. It doesn't come from nowhere, but it's still created and created outside of banks. https://base.socioeco.org/docs/wir_and_the_swiss_national_economy.pdf https://base.socioeco.org/docs/wir_and_the_swiss_national_ec... To a lesser extent all businesses do this with any difference between values ascribed and paid, goods received and payments scheduled, services rendered and payments received. Paraphrasing George Soros: Classical economics is based on a false analogy with Newtonian physics. It's actually a whole lot more irrational, complicated, interesting, and exploitable. Always remember: Trust is the availability of effective recourse. - Dan Geer (2014) Quotes via https://github.com/globalcitizen/taoup https://github.com/globalcitizen/taoup
sebastien_b 4y ago
What it means? Depends who’s saying it - if it’s a cryptocurrency “enthusiast” (read: bitcoin bro), it’s probably to disparage all fiat and claim how much better their currency is, while conveniently forgetting to mention that DeFi really means “Deregulated Finance”
- xyzzy123 4y ago
  It's possible for cryptobro criticism of the fiat economy AND absolute skepticism of crypto/defi to be valid at the same time. Crypto is a self licking ice-cream cone, yep. Fiat, its management and its creation are politically compromised in complicated ways that largely benefit the wealthy, also yep.
  - rnk 4y ago
    Please provide citations of this? Everything on earth provides better service to the rich, including crypto. Us banks had so many disasters that at least we have working protections for deposits. Whereas crypto has no rules and is in the middle of cascading failures caused by over leveraging and paying impossible 19% interest rates to their depositors who may likely lose everything.
galdosdi 4y ago
Yeah, the academic subject is called "macroeconomics" so if you look for good textbooks on that subject they should explain these details. At a crass level, in the USA, my understanding is the main mechanism used is: there is someone at a desk with a terminal at the Fed bank in NYC that can buy and sell treasury bonds for "free" (dollars that vanish or appear as needed, electronically) and they do so day to day to keep the rates within the window established by the FOMC committee. (But there are other ways for the Fed to create and destroy money) So really, the money is going into the hands of any and every one who borrows money during that general time period, and thus receives a lower interest rate than they would have if the government were not carrying out that policy. Larger debtors benefitting to a greater degree, naturally. If you get a mortgage on a small house, you benefit. If you borrow money to take over a large corporation for your hedge fund, you benefit.
- 7373737373 4y ago
  > there is someone at a desk with a terminal I haven't found a single good description/explanation of how the actual operations are carried out "on the ground". It's hard enough to find information on how the financial system works in an abstract way. It amazes me that 99.99% of the people who (also indirectly) use it, including the financial 0.1%, don't know what and "where" their shares actually are. Maybe the exact technical nature of the system doesn't even matter, because ownership and rights are more of a legal idea, but on rare occasions the exact implementation matters. The best explanations of parts of the financial system I have found so far: https://gendal.me/2013/11/24/a-simple-explanation-of-how-money-moves-around-the-banking-system/ https://gendal.me/2013/11/24/a-simple-explanation-of-how-mon... https://gendal.me/2014/01/05/a-simple-explanation-of-how-shares-move-around-the-securities-settlement-system/ https://gendal.me/2014/01/05/a-simple-explanation-of-how-sha... I'd love to read something like this that shows what kind of hardware and software is actually being used, and which standards are at the interfaces between institutions. What physical, hardware and software requirements are actually needed to start a bank? These seem to be the backbone of the system: https://en.m.wikipedia.org/wiki/Systemically_important_financial_market_utility https://en.m.wikipedia.org/wiki/Systemically_important_finan... https://en.m.wikipedia.org/wiki/Systemically_important_payment_systems https://en.m.wikipedia.org/wiki/Systemically_important_payme... https://en.m.wikipedia.org/wiki/Systemically_important_financial_institution https://en.m.wikipedia.org/wiki/Systemically_important_finan...
dead_beef_face 4y ago
The Fed is not printing money. The Fed is incapable of printing money. The Fed creates Bank Reserves. Bank Reserves are not legal tender, and cannot be spent in the economy directly. Reserves are used to create loans, which creates money. If you want to know what happens to the money created by large institutions, look at a chart of any major index from 2012 onwards........
f0e4c2f7 4y ago
I found this textbook to be a good explanation from essentially zero knowledge about how the fed / central banking works. https://www.amazon.com/Central-Banking-Sustaining-Financial-Stability/dp/1118832469 https://www.amazon.com/Central-Banking-Sustaining-Financial-...
kurupt213 4y ago
The US money supply isn’t just created out of thin air. The treasury bill that the US treasury exchanges for the ‘money’ is.
tmaly 4y ago
I found references to what the Fed did during the Great Depression in Mises book Human Action that I found eye opening.
twoxproblematic 4y ago
abdabab 4y ago
Ray Dalio explains it here https://youtu.be/PHe0bXAIuk0 https://youtu.be/PHe0bXAIuk0
neilwilson 4y ago
All banks operate by discounting assets into their own liabilities. They take onto their balance sheet an asset and issue their own liabilities against it. So a mortgage is the creation of a financial asset on the books of the bank called a 'mortgage', secured against a house, against which it creates an 'advance' - the liabilities you use to buy the actual house the mortgage is secured against. The result is the bank's balance sheet expands and that's what 'printing' or better named 'creating money' is. The 'advance' then just keeps swapping hands in the private sector, and that's what we call 'money'. That keeps happening until somebody uses some of it to pay back a loan at which point that portion of the 'money' disappears. The bank's balance sheet shrinks and that is 'destroying money' The government is no different. When it spends, then by default the central bank provides an overdraft loan to the Treasury department, secured on the government's ability to tax, and creates an 'advance' that it uses to pay people. The central bank's balance sheet expands and money is 'printed' When government receives taxes that reduces the overdraft loan and the central bank's balance sheet shrinks, and money is 'destroyed'. In a sensible world that is where it would stop. However some people don't like the idea that government spends by borrowing from the bank it usually owns, or at the very least controls, (even though that is the cheapest place government could borrow from since anything it paid in interest would come back to it as the central bank dividend) so they try to hide the fact or stop it from happening. Usually they introduce a rule that says government can't have an overdraft. However that is normally only a rule that government can't have an overdraft overnight, so the above still applies during the day whichever currency area happen to be operating in. It would be difficult to run an efficient bank clearing system otherwise. At which point the Treasury issues a different sort of money called a 'bond' which 'primary brokers' then take as collateral to a bank. The bank temporarily buys the bonds by creating an advance against them. That advance is transferred to the Treasury department who uses it to clear the overdraft. The primary broker then sells the bond into the wider market and receives money in exchange which it uses to buy back the bonds from the bank so it can transfer the bonds onto the end purchaser. QE is just the central bank buying bonds permanently using the same mechanism that the primary broker's bank used to buy bonds temporarily - issuing an advance against the bonds which then 'creates money'. In reality it is nothing more than an asset swap. Whoever had the bond as savings ends up with a newly created bank deposit as savings instead - at a lower and variable interest rate. QE is a way of changing the type of savings held in aggregate, not a way of 'issuing money' as some people still think. QT is the opposite. The central bank sells back the bonds it owns to the market and the end purchaser ends up with a bond, not a bank deposit. The bank deposit is destroyed. The overdraft the Treasury uses can be disguised in another way. The bond issuing and QE mechanisms above are used in tandem until the Treasury account reaches a particular positive balance. That trick is used by the TGA in the USA and the DMA in the UK to try and make it look like the government is never borrowing - even intraday. It is just a facade. Operationally it makes no difference. The central bank will never bounce a government payment instruction. I've simplified the above as much as I can, but it is still quite involved. I hope you can follow it.
yosefjaved1 4y ago
In the context of the US, it means the federal reserve (which isn't even the US government) is purchasing a ton of Treasury securities from it's member banks, which are now flushed with excess cash that they can use to lend and profit from. This lending is what actually injects money into the economy. If the banks lend a lot of it out, this in turn will start driving down interest rates, which in turn causes a ripple effect across the economy. Notice that I said "can". If the banks don't actually lend out any money to people and businesses, then no money is actually created and interest rates won't go down. If you don't think that's possible then read about Japan's lost decade and zombie banks. "Which private hands are receiving it? Do they get it for free?" The federal reserve buys directly from its banks (with some exceptions). It doesn't buy Treasury securities from the federal government/Treasury. This is in accordance to federal reserve act (https://www.federalreserve.gov/faqs/money_12851.htm https://www.federalreserve.gov/faqs/money_12851.htm) The federal reserve will credit the money to its member banks out of thin air/electronically. They don't print physical money. These banks don't get the money for free. They have to have the Treasury securities to sell to the federal reserve. Where you can learn about all this? This is a macroeconomics subject matter. In college, it's usually the third econ course that business and econ majors take. Usually the title of the course is "Money and Banking". If you really want to get into the practice of it, then many universities offer a course called "Central Banking"; warning: you have to be really into ECON and this is an advance level course... You can also try this course on Udemy about central banking. It's probably not as advance as the university level course, but maybe it's good enough - https://www.udemy.com/course/central-banks-and-quantitative-easing/ https://www.udemy.com/course/central-banks-and-quantitative-...
- neilwilson 4y ago
  "which are now flushed with excess cash that they can use to lend and profit from" That isn't true. In fact holding the cash in the USA prevents banks from doing lending due to the liquidity ratio requirements. Other nations don't include cash in that ratio. The US does. Banks never lend money on. They just create it. See 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-...
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yobbo 4y ago
https://www.bankofengland.co.uk/monetary-policy/quantitative-easing https://www.bankofengland.co.uk/monetary-policy/quantitative... When central banks buy bonds, they "create" the money the same way we insert a row into a database table. Buying bonds is equivalent to lending money; and the central bank lends money below any market rate.
than3 4y ago
This is a very complicated question because it relies heavily on your understanding a lot of how the financial system already works. Disclaimer: I'm not an economist, just an interested third-party. There is no single book that will explain it, and it changes so any book will likely be quickly out of date by publish date. The banking system is a fractional reserve system. That means each private bank from the smallest local bank to the top 5 must keep a fraction (percentage) of their managed assets in reserve as treasury bonds. The rest of the money can be loaned out. The Fed itself is a private corporation, it consists of a Board of Directors (Washington DC), 12 Fed Branches, and the FOMC Committee. The book, The Creature of Jekyll Island, has many useful references in coming to terms with how this came about albeit very critical, its references appear to be accurate at least in the newer versions. The Fed, auctions off bonds each day, which to my understanding, the banks are forced to buy and hold for the reserve and other market operations. Quantitative Easing is nothing more than money printing. Assets are swapped for bonds allowing banks to loan more money out (in the interest of preventing liquidity freezes), and there are REPO and Reverse-REPO operations that allow injecting money by loaning the assets (often loans and other securities), or flat out purchasing them. Like with student loans, they become backed by the government. For the last decade or so, the assets transacted have primarily been toxic assets that may be valued above their actual value. There is little transparency, they've gone by many names Collateralized Debt Obligations being the most infamous. The banks keep the money, make more money by loaning more money out (with little regard for risk), and then sell it back to the FED. In short, its counterfeiting and fraud if anyone else does it; but not when this is sanctioned by an arm of the FED. Ray Dalio has good material on historical debt cycles. It appears that we are likely to be looking at something similar to Zimbabwe, (Weimar Germany was better) and that's coming up in the near future. You have to get pretty deep into Economics coursework to correctly calculate and even economists often get this wrong because there is no accounting for fraud in the existing system. Junk in, Junk out. Its worsened by the lack of credibility, and the fact that the measures for calculating important metrics such as CPI, Jobs Reports, Unemployment, etc, have been systematically changed so the metrics are under-reporting. This is not new, it has happened over the last 40 years like climate change; no one important paid attention. The metrics now follow more inaccurate methodology and that appears to be driven largely to reduce Cost of Living Adjustments (for Social Security), thereby reducing discretionary spending from people with fixed income. Its known that those at the top of the system generally get the most benefit from the money created by the system than those at the bottom. So the question I imagine you are actually wondering (because this is an XY question), is how this all works when you have to factor in the fact that people default on debts and there is bankruptcy protection. Where does that debt go when it becomes un-collectable. If its an individual they had to show collateral to get the loan in the first place, and they lose that collateral. Any excess (unsecured) amount is a liability to the lender. Anything not collected or paid that's written off comes at the expense of the lender. If its a large bank, you have the frauds like the too-big-to-fail, or more appropriately, so big it will certainly fail. These get bailed out with public funds (which are printed) and may even be zombified (Freddie Mac) so they can work around legislation preventing the Fed from buying direct assets. In other words, every single extra dollar printed devalues all other dollars in circulation which are held by everyone. This is often seen in the form of inflation. The money you held is worth less tomorrow than it was today. Normally there is a target of 2% inflation per year which mimicked gold being mined, but as anyone is aware over the past 20 years we haven't hit that target, its been much higher, while wages largely haven't risen to match. Because there is often a lag between when we find out about the printing, and the amounts, everyone holding US dollars and treasury bonds end up being bag holders. This can continue for decades, until you reach a certain point and a currency crisis ensues. This historically has happened around the 300:1 paper to actual asset ratio, or leverage ratio. Also, as a side note, many of the trend relationships we've seen historically have inverted, likely in large part due to undisclosed bad actors. For example, a few years ago China had a large amount of gold found to be gold plated copper after audits. The gold backed huge loans which then defaulted. The money that was paid out didn't disappear out of existence, and because it represented a systemic risk I believe (I'd have to double check on that) that they were bailed out. Similar issues have occurred in the past with railroads where failing railroads were cannibalized by their banks with the intent of being bailed out. As far as I'm aware none of the banks involved in the Penn Central bailout received much in terms of punishment for their bad behavior and did receive bailouts. They didn't have to disclose financials due to exemptions for regulated industries, and they were failing, the funding banks board members gained control of the Railroad board (same people), lent vast sums to pay out dividends, and then filed for bankruptcy and got bailed out. The COMEX for many assets only deals in paper (called Warrants) unless you work with a broker that has a loadout policy, and the market for Silver has been artificially manipulated for decades (by JPM) up until the DOJ let them off the hook with a slap on the wrist. They moved to the UK and are doing it all over again but I digress. Paper to Physical in Gold/Silver are roughly 200-300:1 physical oz. Fun fact, the COMEX is a private institution that has never been independently audited. There's similar issues going on with synthetic stock market shares and dark pools that have gone unaddressed. It should also be noted, that Quantitative Easing is only a small piece of the overall fiscal deficit and liabilities. For private individuals to do these things, its called fraud and is a form of a Ponzi scheme. These systems could be made simple, but instead they favor complexity because the added complexity limits those who can benefit.

neilwilson 4y ago

That's completely untrue. For every debt there is a financial asset. It all sums to zero. Interest pays for itself. It is nothing more than the wages of bankers. Banks earn interest and pay it to bankers and shareholders, who spend it with firms for stuff who then pay it back to the banks. It's always worth remembering to differentiate stocks and flows. $ and $/month are as different as miles and miles per hour.

origin_path 4y ago
Yes. Hard to over-emphasize how important this point is. For the longest time I also incorrectly understood the money system because I watched videos (DVDs back then) that claimed there wasn't enough money to pay back all the debt, and I believed them. The simplest way to understand why this isn't true is to consider the following thought experiment. 1. Alice has $100. This is the only money that exists in the world. She loans it to Bob at a rate of 10% interest. 2. Bob receives the money and immediately hands it back to Alice in order to purchase supplies to set up his new business. Alice now has $100 again, and Bob owes $110. Note: total debt > money supply. 3. Bob creates his business and finds a customer - Alice again, who lent money to Bob because she needed his business services. 4. Alice pays Bob $20 for a widget he made. 5. Bob now has $20, Alice has $80. 6. Bob uses that $20 to pay off part of his loan to Alice. He gives it right back to her, which clears both his interest payment and part of the principal. Alice now has $100 again, and Bob has nothing, but Bob now owes Alice only $90. 7. Go to Step 4 and repeat until Bob's debt is reduced to zero. In this scenario Bob will eventually pay off his debt even though there apparently isn't enough money to do so. The reason is the difference between stocks and flows, as neilwilson points out. Debt is cancelled by a flow of capital, but money circulates and as it moves it creates flows. The less money you have the faster it needs to move to cancel a debt in unit time.
- marapuru 4y ago
  Very well explained. Thank you for this.
- nine_zeros 4y ago
  I don't think that when people talk about money being debt, they are denying that the flow will not destroy the debt. The flow surely will destroy the loan. But when the first loan was made, $10 was given to Bob. But Alice also saw the same $10 as an asset. This created more money in the system, as in, suddenly both Bob and Alice were rich. And when the debt was finally paid off by Bob, Bob is poor again. The only way more money can come into the system, and Bob can have money again, is if another loan is made. So it follows that the only way to pay off existing debts is to create more debt because of debt is repaid with just "work", wealth is destroyed, leading to recession/depression.
  - origin_path 4y ago
    No money was created in the above example because neither Alice nor Bob are banks. You could also argue that even if Alice was a bank, there is no actual problem because the money has not actually been created, the bank is merely claiming the money is there, as people discover from time to time when there's a bank run. "And when the debt was finally paid off by Bob, Bob is poor again." Not quite. The above example is a thought experiment just to demonstrate that a common argument about money is false, but if we want to take it seriously then by the end of the process Bob has no money but he now owns a productive business. In reality of course there are more people than just Alice and Bob, so Bob will hopefully sell to more people and get rich that way. "So it follows that the only way to pay off existing debts is to create more debt because of debt is repaid with just "work", wealth is destroyed, leading to recession/depression." You're mixing up several different concepts. No wealth was destroyed in the Alice/Bob example. Both Alice and Bob ended up richer. Alice ended up with widgets, and Bob ended up with a business. Wealth was created, not destroyed.
    - nine_zeros 4y ago
      I see where you are coming from but I can also see you are missing the point. > No money was created in the above example because neither Alice nor Bob are banks. You could also argue that even if Alice was a bank, there is no actual problem because the money has not actually been created, the bank is merely claiming the money is there, as people discover from time to time when there's a bank run. Creation of money is an abstraction. When Alice made a loan to Bob, Bob got a deposit in their bank account but Alice never lost her deposit. Alice sees the same thing as her asset as Bob sees as his liability. However, both can trade the asset/liability for goods and services. This is creation of money, via fractional reserve, since both the lender and borrower can trade goods with the same base money. > Not quite. The above example is a thought experiment just to demonstrate that a common argument about money is false, but if we want to take it seriously then by the end of the process Bob has no money but he now owns a productive business. In reality of course there are more people than just Alice and Bob, so Bob will hopefully sell to more people and get rich that way. And that is the point. Bob can pay off his debt by selling goods to others. But those others they sell the good too also only have money if it was created via debt somehow. Not a single human bootstrapped with dollars. It was all created via a loan on some balance sheet and the human simply acquired it via trading of their work. > You're mixing up several different concepts. No wealth was destroyed in the Alice/Bob example. Both Alice and Bob ended up richer. Alice ended up with widgets, and Bob ended up with a business. Wealth was created, not destroyed. Wealth obviously was destroyed. At the inception of the loan, the total amount of money in the system was money owned by Alice2. When the debt was payed off, the total amount of money in the system was Alice1. While it is true that Bob ended up with a business, it is also true that the amount of money in the economy has shrunk. Wealth was created with the new business but wealth was also destroyed with the asset/liability draw eliminated to zero. What helps really understanding this wealth effect via fractional reserve is scaling your example to the entire dollar economy. By your example the total amount of money in the system effectively is zero because ultimately it is all two sides of the balance sheet. Yet, wealth is still measured in assets whose value goes up by that asset being more valuable through others spending money that was created via debt.
brutusborn 4y ago
No, it's partially true. For every debt their is an asset, but the value of the debt created is not always equal to the value of the assets. Here is a good article from the Reserve Bank of Australia describing how banks create money via loans, and lists the conditions by which "money creation is constrained." Note how none of the conditions ensure that Value(asset) = Value(debt) "Money can be created, however, when financial intermediaries make loans." "However, the process of money creation is constrained in numerous ways and depends on the behaviour of borrowers, banks and regulators, as well as the stance of monetary policy. " https://www.rba.gov.au/speeches/2018/sp-ag-2018-09-19.html https://www.rba.gov.au/speeches/2018/sp-ag-2018-09-19.html Edit: just to clarify, imagine a pre-GFC mortgage of $1million. This loan results in money creation of $1million + loan of $1million. But if the market crashes and the asset(house) is now worth $200000, the house may be forfeited because the loan is not being repaid. If the house is sold by the bank to balance the debt, the economy now has $0.8million extra money floating around. The bank may have to pay the central bank this $0.8mill eventually, but will do so under relatively tiny interest rates, so the money remains in the economy for as long as it takes the bank to repay the loan. Or the government bails the bank out and the created money becomes permanent!

mike_hearn 4y ago
Heh, I worked together with Richard for quite a few years. Yes he's done some great writing on the topic of how banking works and is very knowledgeable. I don't think he reads Hacker News much though. The reason there's not much info out there on how it works is that it's mind numbingly complicated. It's mostly open but the exact technical details vary by country. The gist is that every bank has a connection to the central bank's dedicated securities settlement computers. Connection here means either: 1. A fibre leased directly from a telco, that physically runs between the bank and the central bank via one or more switching centres. The point is that it's not the public internet. It's a private network and in some countries may not even run on TCP/IP but something older. 2. A connection via SWIFT. 3. A connection via the internet. SWIFT is the most popular approach and it's common that internet access is less powerful than if you connect via SWIFT. For instance it'll have fewer features, lower SLAs and hilariously the ECB closes its internet access at night for "security reasons" (presumably they have people paid to physically watch internet traffic into the system). SWIFT is a private or semi-private network that you can't connect to unless you have either a direct hard line, or a business relationship with a connectivity broker, or maybe these days they also allow direct internet access via VPNs. It's basically a giant message queue broker with some business logic and data formats layered on top. SWIFT lets you send messages from one organization to another with authentication and being independent of details like underlying IP addresses. SWIFT will queue the messages for the organization if they aren't online right now, although mostly of course banks always are, and they do some validation and identity checking along the way (sometimes). You pay per message. Getting a SWIFT connection is part of what it takes to set up a bank. So the central bank and the banks all have connections either to each other or SWIFT, and even if they're directly connected they're probably still using SWIFT format messages which are a sort of open standard or they'll be using something like a central bank specific XML format. If you really want to nerd out on the details try reading the TARGET2 user guide. TARGET2 is the ECB's central computer systems: https://www.ecb.europa.eu/paym/target/target2/profuse/nov_2020/shared/pdf/Information_Guide_for_TARGET2_users_v14.0.pdf https://www.ecb.europa.eu/paym/target/target2/profuse/nov_20... e.g. "The PM account holders may access the SSP via SWIFT (SWIFT-based PM account holder) or via Internet (Internet-based PM account holder). For the Internet-based access, special rules apply, as described in section 3.1.7 Internet-based access." For securities trading (how CBs create money) check out the TIPS user guide which shows you how the UI works: https://www.ecb.europa.eu/paym/target/tips/profuse/shared/pdf/TIPS_UHB_v.2.1.1_191025_rev.pdf https://www.ecb.europa.eu/paym/target/tips/profuse/shared/pd... To connect to any of these systems whether via SWIFT or the internet you will need to be issued with certificates and the keys will need to be in HSMs. This is checked as part of the onboarding process. Banking runs off PKI and large banks can have entire teams devoted to nothing but managing X.509 PKIs. The central bank runs a large computing system that does a variety of tasks. These are still usually mainframes. These computers track the balances of each bank with an account (rarely CBs will give accounts to non bank entities), allow transfers between them and so on. Actually it's more complicated than that - generally banks will build up debts between each other during the day which are tracked by the Real Time Gross Settlement system. At night the system closes for a few hours and the debts are netted out to detect cycles in the graph and delete them, reducing the amount of capital you actually need to hold with the CB. This is all done by proprietary CB software. In older times it was normal that what you get from these quasi-government agencies is just a message based API, but these days they may also provide (incomplete?) GUIs. The ECB TIPS system for example provides a GUI for basic uses, which as recently as 2019 is/was based on Java applets and ran only on IE 11 as a consequence. I believe the Fed UI is still literally telnet to a mainframe. But most banks will develop their own software and UIs to interact with these systems. Traders are notorious power users and can benefit enormously from custom written software. Web apps are often a poor fit for them because the apps are trusted so the sandbox just gets in the way, they want to have a bazillion windows open on half a bazillion screens, they want full keyboardability, powerful analytics tools, Excel integration and so on. So another part of running a bank (that does trading at least) is the development of the necessary tools and software for your staff. So in summary, to start a (big) bank you will need at least: 1. A SWIFT connection, possibly via a broker, which in turn means needing HSMs and maybe renting a dedicated (switched) fibre connection to your datacenter. 2. Accounts with the central bank. Getting these in turn implies security audits, capital requirements, licensing requirements, and so on. Getting a banking license triggers yet more tasks like proving to regulators you have developed or bought an anti-money laundering platform (these are very expensive). 3. A software stack that can drive the relevant APIs and messaging systems so you can actually move money around the financial system. In turn your customers need ways to drive their money so you need software for your users and agents that turn mouse clicks into the underlying XML/SWIFT/FIX messages. I've erased a massive amount of detail here e.g. the role of CSDs in securities trading. The financial system is tremendously complicated, but at a technical level it's all held together with PKI, XML, SWIFT/FIX messages, dedicated connections and a LOT of Word documents.
- 7373737373 4y ago
  I was looking at https://en.wikipedia.org/wiki/List_of_African_stock_exchanges https://en.wikipedia.org/wiki/List_of_African_stock_exchange... recently and was wondering how developing nations even manage to acquire the necessary know-how and resources to connect to the financial system. Analog markets seem to be one of the earliest types of "civilizational infrastructure" to emerge, at least once there is a road or shipping route available. But in countries where mainframes have never existed, and computing and the internet are both relatively recent technology, this must be a huge challenge!
  - mike_hearn 4y ago
    Plenty of people in Africa who can do that sort of work. But there are big networks of brokers and intermediaries who will translate for you between paper based systems and the electronic world, or provide white-label services and so on.