The Federal Reserve Does NOT Print Money

[MOE from between St. Joe's River and the railroad tracks]

I know, I know, you probably disagree with me. Just let me briefly explain what the fed is actually doing.

The fed creates banking reserves and exchanges them for treasuries via a process called open market operations to manipulate interest rates. So what happens during an open market operation? Well, The Federal Reserve Bank of New York purchases a treasury bond, bill or note from the a primary dealer in exchange for a bank reserve

So what is a primary dealer? A primary dealer is a bank which is obligated by U.S. law to buy U.S. govt. debt to facilitate the open market operations process. The following link lists the U.S. primary dealers: http://www.newyorkfed.org/markets/pridealers_current.html

The Federal Reserve creates a bank reserve that it swaps with the primary dealer. The effective accounting entry from the fed's point of view is below. Note that this transaction Increases an asset and decreases an asset--the result is a wash.


Debit: Treasury Security (Assets go up by x)
    Credit: Bank Reserve (Assets go down by x)


The primary dealer receives a bank reserve for a treasury security. The accounting entry is below:


Debit: Bank Reserve (Assets go up by x)
    Credit: Treasury Security Assets go down by x)


It's really as simple as that. The fed DOES have the state granted magic power to create reserves, however it is important to note that net private sector assets DO NOT CHANGE--just look at the journal entries if you don't believe me. This is not just the accounting for open market operations, it is also the accounting for QE 1 and QE 2. There is no money printing going on; the fed is just swapping reserves for treasuries like it always does and now its given the process a serious sounding name to make it look like the folks at the fed have the power to "stimulate" the economy.

The theory is that reserves create "high-powered money" when banks pyramid loans on their reserves. This is just not how modern banking works. Total bank credit is constrained by capital regulations and by loan demand--not the level of excess reserves.

[Diogenes The Cynic]

The gun does not kill you, the bullet does!

[freeAgent]

But once the reserves are in the bank, they're no different from cash deposits from an accounting perspective.  Assuming reserve requirements are met, the bank is allowed to lend that money out minus the reserve requirement on it.

My largest issue with FTL on monetary policy is that they're always screwing up the definition of inflation.

[Turd Ferguson]

The gun does not kill you, the bullet does!

The bullet doesn't kill you, the loss of blood does!

Poor Bulletey, always gets blamed for everything.

[dalebert]

Disney's gonna sue you.

[Turd Ferguson]

I'll finally get my 15 minutes of fame.

[MOE from between St. Joe's River and the railroad tracks]

But once the reserves are in the bank, they're no different from cash deposits from an accounting perspective.  Assuming reserve requirements are met, the bank is allowed to lend that money out minus the reserve requirement on it.

My largest issue with FTL on monetary policy is that they're always screwing up the definition of inflation.

The thing is, banks don't lend their deposits. A bank just makes a loan and that's it. When you go to a bank, they don't look for a deposit to "loan to you", they just debit an account receivable (which is the loan) and credit the cash amount of the loan. Banks also don't lend their reserves. Reserves really only serve as a regulatory tool by the fed, but U.S. banks are constrained by capital ratios--not reserve ratios.

The stuff in econ textbooks is just wrong! I can think of two recent studies which demonstrate a zero correlation between bank reserves and excess reserves to bank lending. Of course there's no correlation because that's not how a bank functions!

[not freedom]

It doesn't matter how much money is printed or who prints it, if it never enters circulation, via loans, nothing changes. Presidents or governments do not create jobs, BANKS DO!

[not freedom]

*private* jobs that is.

[Cognitive Dissident]

The gun does not kill you, the bullet does!

The bullet doesn't kill you, the loss of blood does!

Poor Bulletey, always gets blamed for everything.

The loss of blood doesn't kill you.  The lack of oxygen does.

[Turd Ferguson]

The loss of blood doesn't kill you.  The lack of oxygen does.

Geez..... we're being awfully picky aren't we?  

[MOE from between St. Joe's River and the railroad tracks]

It doesn't matter how much money is printed or who prints it, if it never enters circulation, via loans, nothing changes. Presidents or governments do not create jobs, BANKS DO!

Well I disagree with this. Printing money is inflationary--however the fed is not the culprit of money printing.

A lot of people are going to look puzzled when hyperinflation never actually comes!

[Diogenes The Cynic]

It doesn't matter how much money is printed or who prints it, if it never enters circulation, via loans, nothing changes. Presidents or governments do not create jobs, BANKS DO!

Well I disagree with this. Printing money is inflationary--however the fed is not the culprit of money printing.

A lot of people are going to look puzzled when hyperinflation never actually comes!

No, I think most libertarians will be standing in line, waiting to spend our money at the grocery store in the morning before it inflates throughout the day with smug looks on our faces.

[alaric89]

It doesn't matter how much money is printed or who prints it, if it never enters circulation, via loans, nothing changes. Presidents or governments do not create jobs, BANKS DO!

Via paychecks to tax eaters. It is in circulation.

[Cognitive Dissident]

It doesn't matter how much money is printed or who prints it, if it never enters circulation, via loans, nothing changes. Presidents or governments do not create jobs, BANKS DO!

Via paychecks to tax eaters. It is in circulation.

Correct.  In the numerous ways it's "created," (debt is what's being created, and it's being "shared" with all of us) it exists, devalues the linen you have in your pocket, and does not need to be printed to be a result of theft, either way.