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>> Interpreting "printing money" to replace the more technical "controlling the size of the monetary base[1]" These are different things. Printed money is cas

>> Interpreting "printing money" to replace the more technical "controlling the size of the monetary base[1]" These are different things. Printed money is cash (or currency) and it represents a small amount of the total money in use, just under 3% in the UK. I don't have the figure to hand for the US but it's comparable, less than an order of magnitude difference. Printing money isn't a significant driver of the size of the monetary base, currency is (more or less) printed to replace the notes & coins that are guessed to have been lost or damaged. Talk about printing money, especially as a means to expand the monetary base, is usually misguided. The monetary base consists of currency in circulation + reserve balances. Reserve balances in the US, since March 2020 (Fed reserve requirements changed to 0%), refers only to the balance recorded in the account at the central bank for a given commerical bank (or other approved user of reserves). Reserves are money but they're a special kind of money that can't be spent in the economy. They're only usable by the central bank and institutions who are licenced to hold reserves at the central bank (predominantly commercial banks). They're not phyiscal (reserves used to include actual cash in the vault back when there were reserve requirements). Reserves, like most money today, just exist as rows in a DB on a computer. There's an unlimited supply of reserves available to commercial banks (via the discount window), they are created on demand as needed from nothing by the central bank and charged at the discount rate in unlimited supply. A commercial bank today cannot run out of reserves. >> the fed tries to tweak the money supply The fed doesn't control much of the money supply, most of our money is created as commercial banks issue new loans. There's a common misunderstanding that commercial banks operate as intermediaries lending deposits, but they don't.

bubbleRefuge 4y ago
100% + I'd expand by saying the Fed uses its operations to control the price of money, which is interest rates, not the supply of money. The supply of money has many factors such as how many loans are created, etc. Taxes paid. etc beyond the Feds operational control.
- jnwatson 4y ago
  That’s a rather pedantic interpretation. Yes the Fed doesn’t run the printing press, and it doesn’t set M1, but it controls the levers. That’s like saying to the police officer: “I didn’t speed, I merely pressed on this pedal that’s connected to a rod that opened a valve providing more fuel to the engine that’s connected to the wheels”.
  - CraigJPerry 4y ago
    How does the fed control the levers? Customer approaches commercial bank for a loan, bank assesses credit worthiness[1] and choses to make the loan. New money was “printed” into the economy. What levers did the fed pull? Also what function does the fed have in the tax part the GP mentioned? [1] the bank has other depts looking at capitalisation constraints, another dept managing day to day operations of the reserve account, perhaps another dept managing funding sources etc. but the loan making function doesn’t consult them before creating new money to make the loan
    - jnwatson 4y ago
      The most obvious, direct lever is they set the reserve requirement ratio. The bank isn't going to make the loan if they don't have the reserve. The next mechanism is setting the Fed funds rate and discount rate. That will very directly incentivize the bank to loan more or less money. The third is the ability to buy whatever asset it deems necessary to support the economy. Quantitative easing almost directly impacts money supply.
      - CraigJPerry 4y ago
        >> they set the reserve requirement ratio No that doesn't exist anymore: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm >> The bank isn't going to make the loan if they don't have the reserve The bank has unlimited reserves since the central bank will issue reserves via the discount window in unlimited quantities. Loan making is capital constrained, not reserve (or deposit!) constrained. >> That will very directly incentivize the bank to loan more or less money No. This is ignoring what's happened over the past 14 years. >> Quantitative easing almost directly impacts money supply Again - this is a statement that isn't supported by what we've seen happen since the GFC.
HWR_14 4y ago
I am skipping the digression about whether "printing money" should taken literally to mean the actions of the actions of the Mint/Bureau of Engraving as opposed to the controlling the monetary base. The Fed both controls the rate that commercial banks are charged (via the discount rate, or other rates based on it) to access the discount window and the rules for doing so. Infinite reserves[1] that charge interest when used aren't infinite. They explicitly have to be used to generate more value than the repayment with interest or the banks lose money and go broke. If I am wrong, please explain how. But I interpreted most of your post a pedantic explanation about how their control of the money supply wasn't direct and instead through controlling other things that then controlled the money supply. [1] Only, of course, capital requirements limit banks ability to lend.
- CraigJPerry 4y ago
  >> I am skipping … controlling the monetary base You can’t really do that and hope to have a handle on how money works. If you don’t have a grasp on the meaning of reserves, you’re sunk. What are reserves, how are they created, how are they destroyed and why are they exchanged between banks? If you can answer these then you’re a solid third of the way to fully understanding this space. You’ve talked about controlling the monetary base which makes me think you’ve fallen down the exogenous money hole. While you’re stuck in that alternate reality you won’t be able to accurately describe how banking works. Money, as we experience it today, is endogenous. >> instead through controlling other things that then controlled the money supply. They don’t control most of the money supply, commerical banks do. Capital requirements rein in commercial banks desire to “print” more money into the economy.

bubbleRefuge 4y ago

100% + I'd expand by saying the Fed uses its operations to control the price of money, which is interest rates, not the supply of money. The supply of money has many factors such as how many loans are created, etc. Taxes paid. etc beyond the Feds operational control.

jnwatson 4y ago
That’s a rather pedantic interpretation. Yes the Fed doesn’t run the printing press, and it doesn’t set M1, but it controls the levers. That’s like saying to the police officer: “I didn’t speed, I merely pressed on this pedal that’s connected to a rod that opened a valve providing more fuel to the engine that’s connected to the wheels”.
- CraigJPerry 4y ago
  How does the fed control the levers? Customer approaches commercial bank for a loan, bank assesses credit worthiness[1] and choses to make the loan. New money was “printed” into the economy. What levers did the fed pull? Also what function does the fed have in the tax part the GP mentioned? [1] the bank has other depts looking at capitalisation constraints, another dept managing day to day operations of the reserve account, perhaps another dept managing funding sources etc. but the loan making function doesn’t consult them before creating new money to make the loan
  - jnwatson 4y ago
    The most obvious, direct lever is they set the reserve requirement ratio. The bank isn't going to make the loan if they don't have the reserve. The next mechanism is setting the Fed funds rate and discount rate. That will very directly incentivize the bank to loan more or less money. The third is the ability to buy whatever asset it deems necessary to support the economy. Quantitative easing almost directly impacts money supply.
    - CraigJPerry 4y ago
      >> they set the reserve requirement ratio No that doesn't exist anymore: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm >> The bank isn't going to make the loan if they don't have the reserve The bank has unlimited reserves since the central bank will issue reserves via the discount window in unlimited quantities. Loan making is capital constrained, not reserve (or deposit!) constrained. >> That will very directly incentivize the bank to loan more or less money No. This is ignoring what's happened over the past 14 years. >> Quantitative easing almost directly impacts money supply Again - this is a statement that isn't supported by what we've seen happen since the GFC.

HWR_14 4y ago

I am skipping the digression about whether "printing money" should taken literally to mean the actions of the actions of the Mint/Bureau of Engraving as opposed to the controlling the monetary base. The Fed both controls the rate that commercial banks are charged (via the discount rate, or other rates based on it) to access the discount window and the rules for doing so. Infinite reserves[1] that charge interest when used aren't infinite. They explicitly have to be used to generate more value than the repayment with interest or the banks lose money and go broke. If I am wrong, please explain how. But I interpreted most of your post a pedantic explanation about how their control of the money supply wasn't direct and instead through controlling other things that then controlled the money supply. [1] Only, of course, capital requirements limit banks ability to lend.

CraigJPerry 4y ago
>> I am skipping … controlling the monetary base You can’t really do that and hope to have a handle on how money works. If you don’t have a grasp on the meaning of reserves, you’re sunk. What are reserves, how are they created, how are they destroyed and why are they exchanged between banks? If you can answer these then you’re a solid third of the way to fully understanding this space. You’ve talked about controlling the monetary base which makes me think you’ve fallen down the exogenous money hole. While you’re stuck in that alternate reality you won’t be able to accurately describe how banking works. Money, as we experience it today, is endogenous. >> instead through controlling other things that then controlled the money supply. They don’t control most of the money supply, commerical banks do. Capital requirements rein in commercial banks desire to “print” more money into the economy.