Monday, December 27, 2010

"Is the Fed Printing Money?"


You write: "Seems to me the banks have a "second" required reserves account that the QE "credits" are going into and do not become a part of the fractional banking system."

I take it you mean an unofficial second RR account... a second account "in effect" as it were. I take it you observe what has happened with bank reserves, and compare it to what would happen if a "second" layer of RR accounts had been set up for the QE funds. If that's not what you mean, I must have missed something!!

Here are excerpts and my initial reactions to the WSJ post that you linked.

Is the Federal Reserve printing money to finance its bond buying? Or isn’t it? Ben Bernanke has given inconsistent answers, at times saying it is and at times saying it isn’t.

It's a sad day when the fate of our economy rests in the hands of people who try to reduce the problem as Bill Clinton did with the line "It depends on what the meaning of the word 'is' is."

On the other hand, maybe Bernanke's doubletalk is the appropriate response to the trivial aggressions phrased as questions, to which he has been subject. I suspect that, even after a lobotomy, Bernanke would be a better economic thinker than all of Congress hooked up in parallel.

In the WSJ post, in the first paragraph after the words "Here is an attempt to sort it out" one finds this little bit of wisdom:

The Fed can do something else. It has the power to electronically credit money to the bank accounts of sellers who in turn sell government securities or mortgage backed securities to the Fed.

I do not understand why that is considered news:

  • If you look at a dollar, right across the top there it says FEDERAL RESERVE NOTE. That means the dollar was issued by the Federal Reserve. This has not been news since 1913.
  • Whether the money is created "electronically," or by printing, or by stringing shells into wampum, is only a matter of technology. As far as the act itself (creating money) goes, the technology is utterly insignificant.
  • Who else would the money be paid to, other than "sellers" ???
  • There is nothing else in that excerpt!

So I have to approach the WSJ article with an expectation of disappointment.


But as Mr. Bernanke has been trying to emphasize lately — perhaps clumsily — most of the money that the Fed has created isn’t circulating much through the financial system. It’s mostly sitting idly, often in deposits — also known as reserves — that banks keep with the Fed itself.

Definitely clumsily. But I agree with the WSJ, that the money isn't causing prices to rise because the money isn't circulating.

As Milton Friedman tried to emphasize, it is not the existence of money, but the spending that influences prices. Further, the money could circulate without causing prices to rise, if the velocity of money were sufficiently slow. (The abrupt fall of velocity was the reason for the QE in the first place!) However, economic recovery presupposes that velocity will return to some higher level. The money is very likely to cause price increases at that time.


Some people say that when new money is created, the people who get it first have an advantage over the rest of us. To me, that's a little petty; but maybe a better word for it would be micro... as opposed to macro.

As things have turned out, the new money is available to people who already have substantial assets, and who are looking to protect their wealth either by getting into or by getting out of dollars. When they get out of dollars, they get into other assets, increasing demand for these, and raising asset prices. If I have my current events right. we can already see that happening.

The new money is not available to those of us already swamped with debt. Fair enough: we'd rather reduce our debt than increase it further. But as a result, at the Consumer-Price-Index level, prices are not rising so much. Yet.

As we see today with the cost of gasoline, rising asset prices will trickle down through the manufacturing process, pushing up costs and prices. I should say, this is just an intuitive analysis. I wouldn't know an asset if I had one.

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