On 60 minutes last weekend Bernanke claimed the fed is not printing money when they purchase treasuries. He said that no new money is added to circulation.
Is this true? I always assumed that when the fed buys something it writes a check to the seller. Doesn’t the seller now have “money” that didn’t previously exist? And couldn’t the seller decide to cash the check if he wanted to and have it converted to physical paper currency?
Bernake and the Federal Reserve don’t have the power to print money. The US treasury prints money.
What you assumed was correct. Continue to assume it.
He said this once before, essentially claiming that they are not increasing M0 (cash in circulation), which is just a strawman. In the 60 minutes episode, he flatly and simply lies when he says they are not increasing the monetary base. I’m amazed that he can state a fairly straightforward falsehood like that, on television, unchallenged. Oh, well, it’s good to be the King.
Clayton -
…? what?
I have another question on this subject.
Suppose the fed buys an asset like a million dollar house for example. The fed “prints” 1 million and gives it to the home owner. Now there is 1 million more dollars added to the monetary base. In this case I can see how the fed could potentially remove that 1 million from the monetary base. They can resell the house to someone and “burn” the million they get back (assuming they can still get a million).
But what about when the fed buys it’s own debt? Let’s suppose they buy 1 million in treasuries. The fed prints 1 million and gives it to the owner (?). Just like with the house purchase. Now the fed owns a piece of paper that promises to pay maybe 1.2 million. If the fed tries to remove that million by selling the 1.2 t-note it will only be temporary because that t-note is a promise to pay 1.2 million dollars! So the net result eventually when the t-note matures is for the monetary base to increase by 1.2 million! Am I correct?
Brian: The Fed orders cash from the Bureau of Printing and Engraving.
Tangent: You noticed how his lip quivered and he seemed really nervous through that interview?
A federal reserve note is just one of many forms of Fed credit. Every issue of Fed credit is, broadly speaking, “printing money”. Whether it’s printed on paper or on a computer, or just agreed over a handshake, makes no difference.
Okay, maybe I’m confused. So the Federal Reserve orders the Bureau to print money for the FedRes for free. And then they lend it to the U.S. Treasury with interest? I always assumed the Federal Reserve printed the money. But basically the U.S. Treasury could just order the Bureau to print it money for free when it needs it without interest?
EDIT: The interview, for anyone who hasn’t seen.
Yeah, I did! WTF was up with that??!?
Clayton -
Yup, his lips were very asymmetrical, like he has being smoking a pipe for decades, and given his words and actions, it’s some heavy shit he smokes.
Stranger: “A federal reserve note is just one of many forms of Fed credit. Every issue of Fed credit is, broadly speaking, “printing money”. Whether it’s printed on paper or on a computer, or just agreed over a handshake, makes no difference.”
Plus the fact that you could get the credit converted to cash at any time if you preferred.
Okay, maybe I’m confused. So the Federal Reserve orders the Bureau to print money for the FedRes for free. And then they lend it to the U.S. Treasury with interest? I always assumed the Federal Reserve printed the money. But basically the U.S. Treasury could just order the Bureau to print it money for free when it needs it without interest?
For the most part when people are talking about the fed “printing” money they are not referring to physical cash. They are referring to accounting entries on the feds balance sheet. The following is an example:
|
|
Assets |
= |
Liabilities |
|
Equity |
||
|
US Gov. Debt |
Comm Bank Debt |
US Gov Deposits |
Com. Bank Deposit |
Fed Equity Acct. |
|||
|
Begin |
$1,000,000,000 |
$1,000,000,000 |
$500,000,000 |
$1,000,000,000 |
$500,000,000 |
||
|
Before the purchase of the bonds you can see that the total money supply is 1.5 billion (the amount of money that the depositors at the Fed have access to). |
|||||||
|
|
Assets |
= |
Liabilities |
|
Equity |
||
|
US Gov. Debt |
Comm Bank Debt |
US Gov Deposits |
Comm Bank Deposit |
Fed Equity Acct. |
|||
|
Begin |
$1,000,000,000 |
$1,000,000,000 |
$500,000,000 |
$1,000,000,000 |
$500,000,000 |
||
|
$600,000,000 |
$600,000,000 |
||||||
|
End |
$1,600,000,000 |
$1,000,000,000 |
$500,000,000 |
$1,600,000,000 |
$500,000,000 |
||
|
When the Fed purchases the bonds it simply makes ledger entries increasing its asset accounts and increasing its liability accounts. |
|||||||
|
|
Assets |
= |
Liabilities |
|
Equity |
||
|
US Gov. Debt |
Comm Bank Debt |
US Gov Deposits |
Comm Bank Deposit |
Fed Equity Acct. |
|||
|
End |
$1,600,000,000 |
$1,000,000,000 |
$500,000,000 |
$1,600,000,000 |
$500,000,000 |
||
|
After the bonds are purchased the depositors now have access to $2.1 billion (US Gov $500 million and Comm Banks $1.6 billion). The money supply has just been increased by $600 million. |
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The fed is not shipping physical cash all around the country. It is only increasing the amounts available to the various banks that deposit with the fed. The money in those accounts is accessed electronically. Its the same way it works when you write a check from your bank that gets deposited into another. The banks simply check with each other then change the balances in the two accounts. They don’t send money back and forth between the two. It is all accounting.
Really the only thing that the treasury does is replace worn out currency. If the FED wanted to increase the volume of currency in circulation… I’m not really sure how that would work. I would assume that the FED would purchase the currency from the Treasury by issuing a check drawn on itself which the treasury would then deposit in thier accounts at the fed. So the Fed would basically be increasing their assets (physical currency held in vaults) and then increasing its liabilities (US Government Deposits) on the other side of the balance sheet.
I liked Jon Stewart’s bit on this last night. Did anybody see it?
Bernanke, however incompetent he seems to be regarding even some basic economic theory, is correct when he says:
We’re not printing money.
The amount of currency in circulation is not changing.
The money supply is not changing in any significant way.
– Ben Bernanke, 60 Minutes Interview, December 2010
Even Quantitative Easing (which Bernanke, being a typical bureaucrat, wants to rename to “Credit Easing”) is not adding to the REAL money supply in any significant way.
This is because money supply is Quantity times Velocity, and Bernanke imagines that he’s adding only enough money to make up for the dramatic loss in velocity that has occurred for the past three years.
The massive addition of money by Fed lending was not added to circulation at all…it’s ended up stagnating in the banks’ reserves.
The reason for this is that the Fed started paying interest on banks’ reserves (an insane thing to do) in 2007.
Remember, the money the Fed “creates” is not real money at all…it is temporary money. People worry that when the economy recovers and velocity returns to a normal level, we’ll be trapped with this huge amount of extra money, but in fact the Fed is lending money that has to be paid back with interest, NOT simply giving away money. The money that is paid back is “destroyed” in the same sense that it was “created”.
What’s more, the Quantitative Easing money is added by buying financial instruments like bonds and notes…and when the Fed thinks the economy is recovering, it intends to SELL those instruments, and destroy the money.
There is a MUCH more detailed, clearer explanation here:
http://butnowyouknow.wordpress.com/2010/12/09/what-bernanke-means-qe2-will-not-boost-money-supply/
The fed is printing money… why would you believe Ben?
Kaz, how are you defining “real money” and “real money supply” in your post above?
Kaz,
How do you explain Bernanke’s declaration 21 months ago that QE IS printing money? I mean, staright from the horse’s mouth. See the Jon Stweart clip.
