12/21/10 Liberia, Costa Rica – Mr. Ben Bernanke. Mythbuster!
“One myth that’s out there,” he told 60 Minutes, “is that what we’re doing is printing money.”
Ha. Ha. Ha. Can you imagine anything so laughable? So ridiculous? So absurd?
And to think that even we, at The Daily Reckoning, believed it. How could we be so credulous?
Of course, the Fed is not printing up money. How could we have been so naïve? The days of printing up money are long gone. Now, the Fed doesn’t do anything of the sort. Instead, it merely buys US government debt from banks. That’s not printing money. Nope. Not at all. Not even close.
But wait. How does it pay for the bills, notes and bonds it buys?
Oh, well, it certainly doesn’t print up money. Instead, it merely credits the banks with the money…electronically. No printing involved. The banks then have money that didn’t exist before.
The banks are supposed to lend it out. For every dollar they get from the Fed they can lend out 10. That’s how it works. So, IF anyone wanted to borrow the money, and IF the Fed had bought, say, $1 trillion worth of US government debt, the banks COULD lend ten times that amount…thus increasing the supply of money in circulation by $10 trillion.
Does that sound like printing money to you?
Nah… Of course not. Does it sound like it might cause inflation? Well, yes… It would be rather surprising if it didn’t. Consumer price inflation is now running at about 1% per year. Why so low? Because, so far, the banks aren’t lending. The Fed adds money to the system. But it doesn’t get passed along.
Why not? Because we’re in a Great Correction. The economy is saturated with debt. People are trying to dry out. And no matter how many times the Fed offers them a drink; they’re still on the wagon.
Of course, if the economy were to go on a binge again, the banks would lend, people would borrow, and all that money the Fed didn’t print would suddenly come out of hiding. Consumer prices would go up. Hyperinflation could come quickly.
Then what would Mr. Bernanke do? He says he would raise interest rates immediately, should the CPI hit 2%.
Well, dear reader, do you believe him? We do. At least as much as we believe he’s not printing money.
Regards,
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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I’m a bit lost can someone enlighten me? I thought it went like this: the Fed buys U.S. treasuries through Primary dealers which were given newly created dollars to do so. However they bought treasuries with those dollars, how can they lend them out again? I only see inflation as the U.S. gov spends the deficit money, but I don’t see fractional lending out of that
Let me know if this makes sense.
The Treasury spends money. The money comes from the Treasury’s account at the Fed, and the Fed ‘credits’ the Treasury’s account.
In return for this, the Treasury issues bonds, which it gives to the Fed in an amount equal to the money it credited to the Treasury’s account.
In the case of the Fed holding the bond and generating the currency, that is ‘new’ money because the Fed generated the cash from the ether.
In this example, say the Treasury spends $10b, the Treasury then sells the bonds on the open market, say $9b, and the sale is not complete so the Fed buys $1b.
The $9b is not ‘new money’ – it is ‘loaned’ by the bond buyer to the Government. If the $9b is purchased by foreigners who have Euros, then they exchange the Euros for dollars (e.g., buy dollars), then using those dollars they buy the $9b of Treasuries. The $9b is then credited back to the Treasury’s account at the Fed.
In this scenario, the purchase of bonds by foreign entities actually removes dollars from circulation (they are now locked up in a T-bill or similar) to the tune of $9b, and the “new money” the Fed created is equal to the $1b in this example.
At the end of the transaction, the $1b represents debasement of USD, not the $10b total spent and sold.
It seems to me where the problem lies is when the ‘world public’ sees giant Fed balance sheet and enormous amounts of Treasurys exceeding the ability of the US economy to handle the debt, and the cash flows reverse. E.g., bond holders sell, get dollars, then put those dollars into other assets or currency, and the world demand for dollars plummets, along with its value.
Right now I see inflows > outflows.
Is there something wrong with my logic on how this works?
Thanks for the clarification…
Dose this sound something like Social Security? Money payed into SS is spent in the general budget and a credit is issued to SS to be payed back from the treasury but the treasury don’t have the money to pay back>
In the grand scheme the Fed relieves the banks from the burden of raising equity capital to conform with the new capital requirements. Sooner or later they will lend because that’s how they make money. Is it inflationary? Yes. But, Congress leaves the Fed no choice since they won’t live up to their fiscal responsibility. So, the Fed inflates our way out of crisis enabling us to pay back our Treasury debt with cheaper dollars than when we borrowed them. Take that, China!
On this link Bernanke flat out says in one interview they do not print money and in the next interview he unequivocally says THEY DO PRINT MONEY.
http://www.elitetrader.com/vb/showthread.php?threadid=211730
Regards,
Michael