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> On the other hand, central banks are constructs of sovereign states and can literally create money out of thin air, which makes the whole bankruptcy question

> On the other hand, central banks are constructs of sovereign states and can literally create money out of thin air, which makes the whole bankruptcy question take on a different dimension. This is not true, at least in the US. The Treasury issues currency. What the Federal Reserve can do (and has done under QE) is perform an asset swap. An asset held by a bank (such as a treasury bond) is purchased by the Fed and held on its balance sheet. In exchange, the Fed credits the bank with a reserve asset. This reserve asset can not be spent in the real economy. It is locked in the banking system and can only be used within it. Reserve assets are not money. They're much more like a utility token. Therefore, the US Federal Reserve does not print money under QE. But there's the fact and then there's perception. Many are either unaware of how QE actually works, or think the distinction between currency and reserve assets doesn't matter. So they behave accordingly.

isthisthingon99 4y ago
Why isn't there a simple freaking flowchart somewhere.
- danielmarkbruce 4y ago
  Because it's so simple it doesn't need one: Bank A sends the central bank a real asset worth $1 million (say, a 10 year government bond). The central bank says "you have a balance with us of $1 million now", and updates their SQL database. "Everyone" agrees the balance with the central bank has real value. Everyone = creditors of the bank, regulators of the bank, accounting standards bodies, auditors, the SEC, trade partners, and probably 10 other groups I can't think of.
  - isthisthingon99 4y ago
    OK but what can they do with this balance
    - danielmarkbruce 4y ago
      Settle payments with other banks is the obvious one - when you send money from Wells Fargo to Chase for example, they settle it behind the scenes by asking the fed to increase Wells balance and decrease Chase's. They can also use it to buy securities from the Fed, to buy securities from other banks, to settle derivatives contracts and margin calls around them.
      - isthisthingon99 4y ago
        how does this make its way into stocks
legitster 4y ago
> Reserve assets are not money, therefore, the US Federal Reserve does not print money. Isn't this only half-true though? While they are not physically printing money, in a fractional reserve banking system they can certainly add to the money supply by exchanging illiquid assets for liquid ones. Agreed though that this is not infinite nor out of thin air.
- SevenNation 4y ago
  Treasuries are one of the most liquid form of money there is. Reserve assets are not very liquid at all. If anything QE sucks liquid money out of the economy, elevating the price of that money (somewhat, according to central banks) in the process.
  - rr888 4y ago
    I think you need to go back to your text books. Treasuries aren't money. They are are super liquid and with repos you can very easily turn them into money but they aren't money as measured by m1, m2, mb etc. Treasury bills (<12m) are included in m4.
    - imtringued 4y ago
      He means that there are non US banking instituions that need US treasuries outside the US but if the Fed is buying them and turning them in reserves they are locked in the US banking system. Central banks of other countries actually use US treasuries not dollars as their medium of exchange between each other. QE actually forces them to hold their medium of exchange in the US banking system. So paradoxically QE can have the opposite effect by turning an asset with wide acceptance into an asset that barely anyone is allowed to access outside the US.
  - anm89 4y ago
    Wow, you are making multiple posts here with an authorative tone and yet you have been deader than dead wrong on most of the things you have said. > Reserve assets are not very liquid at all. ??? Just stop confusing people. This statement has no meaning. Treasuries and gold are both incredibly liquid and are both among thr most common reserve assets. Feel free to google gold market liquidty depth and verify that assumption yourself
danielmarkbruce 4y ago
It say's "create money out of thin air". For a reasonable definition of money (something you use to buy stuff) they are in fact creating money out of thin air. "Money" isn't a term that has an agreed upon definition.
- SevenNation 4y ago
  What kind of stuff do you think a bank can use reserve assets to buy?
  - danielmarkbruce 4y ago
    Treasuries, back from the central bank, or all manner of assets from other banks. It's done every day.
    - imtringued 4y ago
      People don't pay their groceries with treasuries. This is getting circular. Commercial banks sell their treasuries to buy other treasuries? Really?? And where is the money to buy groceries and cause inflation supposed to come from? Come on the answer is so simple you don't need to act stupid. Commercial banks issue deposits against the treasuries and buy more treasuries which they then sell to gain reserves which then lets them issue more deposits to buy treasuries. This is definitely a loop but it has nothing to do with the central bank. The commercial bank could have done the same thing by creating deposits against illiquid treasuries without central bank help but it would endanger the banking system via bank runs. QE basically just turns illiquid treasuries into liquid treasuries, it is basically a duration transformation provided by the central bank so individual banks do not need to take that risk. This by itself can't cause inflation because the type asset changed but not the quantity. You need the government to actually issue more treasuries for inflation to occur and the commercial bank to play along.
      - danielmarkbruce 4y ago
        I didn't mention inflation. It's unclear what the point of this comment is. As mentioned, banks use their central bank account balance for more than just buying/selling treasuries. It's used to settle payments between banks for example. Banks don't tend to buy groceries, but if they did they wouldn't use a treasury as a form of payment. They could use a central bank balance though, if you think about the payment system (US).
guiomie 4y ago
I thought the Fed bought treasury bonds straight from the government, are you saying they only buy these bond owned by banks intially?
- SevenNation 4y ago
  Yes. The Fed buys its treasuries under QE from banks. To pay for it, a reserve asset is credited to the bank within the banking system. No net money is created.
  - scottiebarnes 4y ago
    > No net money is created. Interesting that you're separating the responsibility of money creation to "banks within the banking system", and not the Fed, despite the Fed being the only power here who can buy unlimited assets.
brutusborn 4y ago
I thought currency and reserve assets were essentially the same because there is no basis (e.g. gold) for the currency. It's like your right hand printing currency to give to your left hand to distribute. The left isn't making anything, but it's irrelevant. If the currency was gold backed, the right hand would be tied until the treasury deposited gold; now they can do it whenever the left hand looks empty.
- SevenNation 4y ago
  You can pay for a vacation with US currency. You can't do that with reserve assets.
  - brutusborn 4y ago
    But don't the reserve assets just result in a bank using those assets as collateral for something else that can be used? I.e. you don't pay for a vacation with reserve assets directly, but your bank uses them to pad it's fed account so that your vacation fees are accepted by other banks? Without the reserve assets, other banks wouldn't do business with your account, and you couldn't pay for that vacation.
- legitster 4y ago
  > I thought currency and reserve assets were essentially the same because there is no basis (e.g. gold) for the currency. Reserve assets always have a separate source of value. Usually this means other currencies. And often it can even be gold reserves!
  - brutusborn 4y ago
    What is the source of value for the reserve assets in current QE? And how would you find that out?
scottiebarnes 4y ago
The "money printing" phrase and meme is usually not referring to the literal physical printing of money, it is just a broad stroke meant to encompass the folly of central banks being able to buy unlimited assets with money they don't actually have. The impact of QE is an increase in money supply.
civilized 4y ago
That isn't how Investopedia defines reserve assets: > Reserve assets are financial assets denominated in foreign currencies and held by central banks that are primarily used to balance payments. https://www.investopedia.com/terms/r/reserve-assets.asp https://www.investopedia.com/terms/r/reserve-assets.asp The OECD seems to define it consistently with Investopedia: https://stats.oecd.org/glossary/detail.asp?ID=167 https://stats.oecd.org/glossary/detail.asp?ID=167 Could we perhaps have a source for the definition you're using here?
- civilized 4y ago
  I have made a good-faith effort to substantiate GP's comments and been completely unable to do so. Meanwhile, on Investopedia, the article "How the Federal Reserve Creates Money" directly contradicts GP's claim that the Fed doesn't create money: https://www.investopedia.com/articles/investing/081415/understanding-how-federal-reserve-creates-money.asp https://www.investopedia.com/articles/investing/081415/under... > Printing money is the job of the Federal Reserve, but only figuratively speaking. When the Fed decides to stimulate the economy by pouring more money into the system, it electronically transfers additional credits to the deposits of its member banks. The banks lend that money out to consumers and businesses at a profit, putting the money into general circulation.
lcw 4y ago
Obviously you are correct in that the Fed doesn't print money. That does seem like a misconception. However, they do make money more available by lowering interest rates and QE. This does give banks a disproportionate opportunity to lend more. Both because it's more lucrative for businesses and consumers to take on debt, but also because they need less real money on hand to do so. While I agree it's not printing money out of thin air. It definitely seems to be making money more widely available, and in the end the outcome is the same. However, I think what you are alluding to is there isn't some chaos machine that dump money in the economy with no levers to pull it back.
- centralscam 4y ago
  It's literally creating money out of thin air. The process is just obfuscated behind shell games and big words. Anytime someone borrows money from a bank new money is created. It's supposedly not a problem because when the debt is paid back the money is destroyed again. In reality, though, debt is never paid back, especially by governments. Instead it's refinanced be taking on ever more debt. The amount of debt is only ever growing and so is the money supply.
  - imtringued 4y ago
    >It's literally creating money out of thin air. The process is just obfuscated behind shell games and big words It is done that way to prevent out of control money printing. This process has stopped the concept of money printing since 1970 and it ensured there is less inflation. The central bank is doing its inflation fighting job right now. The difficulty of creating more money is being increased. At some point the deflationary forces of paying back money will arrive and inflation won't continue. It takes time. >In reality, though, debt is never paid back, especially by governments. Instead it's refinanced be taking on ever more debt. The amount of debt is only ever growing and so is the money supply. This is actually orthogonal to how money is created. The gold standard wasn't safe from a permanently expanding money supply even though digging gold is very expensive. If you want to stop debt expansion you would need to read up on Silvio Gesell. Essentially the argument goes that money is both a medium of exchange and a store of value. Those two functions contradict each other. Saved money cannot be used to buy things. As a country becomes more prosperous the medium of exchange becomes scarce because people are saving and delaying consumption. There are still some people who have the need to transact and they need money. They could borrow money but that would make the debt problem worse because they would have to pay interest. They could issue more money but that would make the money supply problem worse. How is this supposed to be resolved? That saved money is like a blocked road, if a road is used as a parking lot, it cannot be used for its intended function, driving. We fine people for illegal parking and they will get their cars off the road and pay for private parking. What is a parking fee on money? It is effectively a negative interest rate or a demurrage fee. It encourages people to save in non money assets and give money to people who still have transaction needs. This is completely orthogonal to what kind of money you have whether it has to be dug out, is printed by the government directly or you have a credit money system. All of them must have what amounts to a parking fee when debt is being paid off.
nemo44x 4y ago
But it allows the banks to loan more money which is in fact created out of thin air. A bank is only limited in how much it can loan by how many assets it has. Money printer goes brrrrrr.
anm89 4y ago
Money and currency are not the same thing.

isthisthingon99 4y ago

Why isn't there a simple freaking flowchart somewhere.

danielmarkbruce 4y ago
Because it's so simple it doesn't need one: Bank A sends the central bank a real asset worth $1 million (say, a 10 year government bond). The central bank says "you have a balance with us of $1 million now", and updates their SQL database. "Everyone" agrees the balance with the central bank has real value. Everyone = creditors of the bank, regulators of the bank, accounting standards bodies, auditors, the SEC, trade partners, and probably 10 other groups I can't think of.
- isthisthingon99 4y ago
  OK but what can they do with this balance
  - danielmarkbruce 4y ago
    Settle payments with other banks is the obvious one - when you send money from Wells Fargo to Chase for example, they settle it behind the scenes by asking the fed to increase Wells balance and decrease Chase's. They can also use it to buy securities from the Fed, to buy securities from other banks, to settle derivatives contracts and margin calls around them.
    - isthisthingon99 4y ago
      how does this make its way into stocks

legitster 4y ago

> Reserve assets are not money, therefore, the US Federal Reserve does not print money. Isn't this only half-true though? While they are not physically printing money, in a fractional reserve banking system they can certainly add to the money supply by exchanging illiquid assets for liquid ones. Agreed though that this is not infinite nor out of thin air.

SevenNation 4y ago
Treasuries are one of the most liquid form of money there is. Reserve assets are not very liquid at all. If anything QE sucks liquid money out of the economy, elevating the price of that money (somewhat, according to central banks) in the process.
- rr888 4y ago
  I think you need to go back to your text books. Treasuries aren't money. They are are super liquid and with repos you can very easily turn them into money but they aren't money as measured by m1, m2, mb etc. Treasury bills (<12m) are included in m4.
  - imtringued 4y ago
    He means that there are non US banking instituions that need US treasuries outside the US but if the Fed is buying them and turning them in reserves they are locked in the US banking system. Central banks of other countries actually use US treasuries not dollars as their medium of exchange between each other. QE actually forces them to hold their medium of exchange in the US banking system. So paradoxically QE can have the opposite effect by turning an asset with wide acceptance into an asset that barely anyone is allowed to access outside the US.
- anm89 4y ago
  Wow, you are making multiple posts here with an authorative tone and yet you have been deader than dead wrong on most of the things you have said. > Reserve assets are not very liquid at all. ??? Just stop confusing people. This statement has no meaning. Treasuries and gold are both incredibly liquid and are both among thr most common reserve assets. Feel free to google gold market liquidty depth and verify that assumption yourself

danielmarkbruce 4y ago

It say's "create money out of thin air". For a reasonable definition of money (something you use to buy stuff) they are in fact creating money out of thin air. "Money" isn't a term that has an agreed upon definition.

SevenNation 4y ago
What kind of stuff do you think a bank can use reserve assets to buy?
- danielmarkbruce 4y ago
  Treasuries, back from the central bank, or all manner of assets from other banks. It's done every day.
  - imtringued 4y ago
    People don't pay their groceries with treasuries. This is getting circular. Commercial banks sell their treasuries to buy other treasuries? Really?? And where is the money to buy groceries and cause inflation supposed to come from? Come on the answer is so simple you don't need to act stupid. Commercial banks issue deposits against the treasuries and buy more treasuries which they then sell to gain reserves which then lets them issue more deposits to buy treasuries. This is definitely a loop but it has nothing to do with the central bank. The commercial bank could have done the same thing by creating deposits against illiquid treasuries without central bank help but it would endanger the banking system via bank runs. QE basically just turns illiquid treasuries into liquid treasuries, it is basically a duration transformation provided by the central bank so individual banks do not need to take that risk. This by itself can't cause inflation because the type asset changed but not the quantity. You need the government to actually issue more treasuries for inflation to occur and the commercial bank to play along.
    - danielmarkbruce 4y ago
      I didn't mention inflation. It's unclear what the point of this comment is. As mentioned, banks use their central bank account balance for more than just buying/selling treasuries. It's used to settle payments between banks for example. Banks don't tend to buy groceries, but if they did they wouldn't use a treasury as a form of payment. They could use a central bank balance though, if you think about the payment system (US).

guiomie 4y ago

I thought the Fed bought treasury bonds straight from the government, are you saying they only buy these bond owned by banks intially?

SevenNation 4y ago
Yes. The Fed buys its treasuries under QE from banks. To pay for it, a reserve asset is credited to the bank within the banking system. No net money is created.
- scottiebarnes 4y ago
  > No net money is created. Interesting that you're separating the responsibility of money creation to "banks within the banking system", and not the Fed, despite the Fed being the only power here who can buy unlimited assets.

brutusborn 4y ago

I thought currency and reserve assets were essentially the same because there is no basis (e.g. gold) for the currency. It's like your right hand printing currency to give to your left hand to distribute. The left isn't making anything, but it's irrelevant. If the currency was gold backed, the right hand would be tied until the treasury deposited gold; now they can do it whenever the left hand looks empty.

SevenNation 4y ago
You can pay for a vacation with US currency. You can't do that with reserve assets.
- brutusborn 4y ago
  But don't the reserve assets just result in a bank using those assets as collateral for something else that can be used? I.e. you don't pay for a vacation with reserve assets directly, but your bank uses them to pad it's fed account so that your vacation fees are accepted by other banks? Without the reserve assets, other banks wouldn't do business with your account, and you couldn't pay for that vacation.
legitster 4y ago
> I thought currency and reserve assets were essentially the same because there is no basis (e.g. gold) for the currency. Reserve assets always have a separate source of value. Usually this means other currencies. And often it can even be gold reserves!
- brutusborn 4y ago
  What is the source of value for the reserve assets in current QE? And how would you find that out?

scottiebarnes 4y ago

The "money printing" phrase and meme is usually not referring to the literal physical printing of money, it is just a broad stroke meant to encompass the folly of central banks being able to buy unlimited assets with money they don't actually have. The impact of QE is an increase in money supply.

civilized 4y ago

That isn't how Investopedia defines reserve assets: > Reserve assets are financial assets denominated in foreign currencies and held by central banks that are primarily used to balance payments. https://www.investopedia.com/terms/r/reserve-assets.asp https://www.investopedia.com/terms/r/reserve-assets.asp The OECD seems to define it consistently with Investopedia: https://stats.oecd.org/glossary/detail.asp?ID=167 https://stats.oecd.org/glossary/detail.asp?ID=167 Could we perhaps have a source for the definition you're using here?

civilized 4y ago
I have made a good-faith effort to substantiate GP's comments and been completely unable to do so. Meanwhile, on Investopedia, the article "How the Federal Reserve Creates Money" directly contradicts GP's claim that the Fed doesn't create money: https://www.investopedia.com/articles/investing/081415/understanding-how-federal-reserve-creates-money.asp https://www.investopedia.com/articles/investing/081415/under... > Printing money is the job of the Federal Reserve, but only figuratively speaking. When the Fed decides to stimulate the economy by pouring more money into the system, it electronically transfers additional credits to the deposits of its member banks. The banks lend that money out to consumers and businesses at a profit, putting the money into general circulation.

lcw 4y ago

Obviously you are correct in that the Fed doesn't print money. That does seem like a misconception. However, they do make money more available by lowering interest rates and QE. This does give banks a disproportionate opportunity to lend more. Both because it's more lucrative for businesses and consumers to take on debt, but also because they need less real money on hand to do so. While I agree it's not printing money out of thin air. It definitely seems to be making money more widely available, and in the end the outcome is the same. However, I think what you are alluding to is there isn't some chaos machine that dump money in the economy with no levers to pull it back.

centralscam 4y ago
It's literally creating money out of thin air. The process is just obfuscated behind shell games and big words. Anytime someone borrows money from a bank new money is created. It's supposedly not a problem because when the debt is paid back the money is destroyed again. In reality, though, debt is never paid back, especially by governments. Instead it's refinanced be taking on ever more debt. The amount of debt is only ever growing and so is the money supply.
- imtringued 4y ago
  >It's literally creating money out of thin air. The process is just obfuscated behind shell games and big words It is done that way to prevent out of control money printing. This process has stopped the concept of money printing since 1970 and it ensured there is less inflation. The central bank is doing its inflation fighting job right now. The difficulty of creating more money is being increased. At some point the deflationary forces of paying back money will arrive and inflation won't continue. It takes time. >In reality, though, debt is never paid back, especially by governments. Instead it's refinanced be taking on ever more debt. The amount of debt is only ever growing and so is the money supply. This is actually orthogonal to how money is created. The gold standard wasn't safe from a permanently expanding money supply even though digging gold is very expensive. If you want to stop debt expansion you would need to read up on Silvio Gesell. Essentially the argument goes that money is both a medium of exchange and a store of value. Those two functions contradict each other. Saved money cannot be used to buy things. As a country becomes more prosperous the medium of exchange becomes scarce because people are saving and delaying consumption. There are still some people who have the need to transact and they need money. They could borrow money but that would make the debt problem worse because they would have to pay interest. They could issue more money but that would make the money supply problem worse. How is this supposed to be resolved? That saved money is like a blocked road, if a road is used as a parking lot, it cannot be used for its intended function, driving. We fine people for illegal parking and they will get their cars off the road and pay for private parking. What is a parking fee on money? It is effectively a negative interest rate or a demurrage fee. It encourages people to save in non money assets and give money to people who still have transaction needs. This is completely orthogonal to what kind of money you have whether it has to be dug out, is printed by the government directly or you have a credit money system. All of them must have what amounts to a parking fee when debt is being paid off.

nemo44x 4y ago

But it allows the banks to loan more money which is in fact created out of thin air. A bank is only limited in how much it can loan by how many assets it has. Money printer goes brrrrrr.

anm89 4y ago

Money and currency are not the same thing.