I shall admit upfront, I am skeptical of all the recent hyper-inflation calls and find them off putting. I cant quite figure out in my head why our central bank would willingly self implode. Perhaps of course, I am looking something to defend my position, but Ben’s recent speech at Jacksonville really drives it home.
“What the purchases do… is… if you think of the Fed’s balance sheet, when we buy securities, on the asset side of the balance sheet, we get the Treasury securities, or in the previous episode, mortgage-backed securities. On the liability side of the balance sheet, to balance that, we create reserves in the banking system. Now, what these reserves are is essentially deposits that commercial banks hold with the Fed, so sometimes you hear the Fed is printing money, that’s not really happening, the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed. Now the question is what happens the economy starts to grow quickly and it’s time to pull back the monetary policy accommodation. There are several tools that we have”
So what do you guys think? My main question of course, what are these reserves? Are they moneys pooled by the commercial banks? It so appears. As we know, QE1 failed because there is no appetite for borrowing, so are the banks now resigned to making money off US Treasury bonds?
Frankly, we should all be relieved to hear this. THe idea that our central bank would print us into hyperinflation is a scary concept, but at the same time, a private central bank has a vested interest in ensuring that he does not self destruct.
I read your explanation, but there are two issues I have.
First, why are you suggesting that the commercial banks with accounts at the reserve banks are not using their own real money? This is what Bernanke is talking about when he is referring to the reserve accounts.
But lets say that did not use their money, but instead made 600 billion dollars out of thin air. There is slightly less than trillion dollars in circulation right NOW. Within 7 months he plans to hand over 600 billion in cash to the US Treasury. Presumably the government will spend this money like it spends everything and thus this money will rapidly enter the economy considering that our government is the only real spender left. You are expecting the total circulation money to rise by over 50%? This is monetary suicide if there is no matching economic output and of course there will not be.
I’m not sure if I’m interpreting Bernanke correctly, but if I am I think he is basically correct. The last sentence says it all. Currently, we are experiencing a liquidity trap, which means that for whatever reason (I use the term “liquidity traps”, but I don’t agree with the Keynesian narrative on its origins) either banks do not want to lend or debtors don’t want to borrow (I think it’s a mixture of both, presently speaking). So, for all intents and purposes, the majority of these liabilities the Federal Reserve is creating are being held. The way I think about it, without too much emphasis on the casual relationship implied in MV=PQ, is that V basically becomes 0. So, there is no net increase in the amount of money in circulation (which is the part which should be emphasized here).
Bernanke correctly notes that if bank lending picks up, these reserves are likely to be lent out. This will put the fiduciary media (well, I’m assuming it’s fiduciary media; it’s difficult to tell what is base money and what is fiduciary media now) in circulation.
I realize this does not include credit in circulation. But if Ben is really printing 600 Billion for the purpose of government spending, then we would see this money in circulation really quickly. Will we not?
To your first point, yes, banks can certainly start lending at some point and this would be a very inflationary event.
“why are you suggesting that the commercial banks with accounts at the reserve banks are not using their own real money?”
Bernanke said "we create reserves in the banking system".
What do you think he means by “create”? The wiki article explains it very well. "A central bank implements quantitative easing by first crediting its own account with money it creates ex nihilo (“out of nothing”).[2]
Maybe you read my post, but may I suggest you read it a few times till it sinks in. Because I think your q is the counterfieter’s absurd assertion of innocence mentioned there. You seem intelligent, and I tried to make it very clear.
“You are expecting the total circulation money to rise by over 50%? This is monetary suicide if there is no matching economic output and of course there will not be.”
Bernanke is playing semantic games. Literally speaking, the Fed is indeed not printing money. However, they are creating money. He says it himself when he refers to “[creating] reserves in the banking system”. Dollar bills aren’t literally printed, but bank accounts are altered so that they’re bigger.
Am I? We have the Federal Reserve chairman in public explaining how debt monetization works.
To counter that, we have a link from the BBC that also explains how it works.
When it comes to economics, journalists are not exactly sources of wisdom.
So we are asserting that Bernanke is lying, boldly, to many people. Pretty amazing assertion is it not, especially when you agree that money in circulation will rise sharply in the 7 months (or whenver QE2 ends).
I will admit though, I am not really sure what he means by ‘creating reserves in the banking system’ other than what the Fed always does. Open market operations.
Auto, that is the purpose of the Fed, his sole existence is exactly what you just described.
He buys treasurys thereby creating reserves in the member banks. As we have seen from QE1 the reserves he created in the banks were not used for anything other than speculative asset bubbles and so he is now using those same reserves to buy additionally issued Treasurys.
It is a circular relationship perhaps, but not greatly outside the traditional role of the Fed or the entire concept of fractional reserve lending.
he is not explaining; he is obscuring, as you yourself noticed.
do a youtube search for “bernanke liar” to see peter schiff calling him a liar on two occasions, as well as other videos saying he is a liar.
and do a google search for “site:europac.net quantitative easing money printing” to see various professionals saying QE is money printing.
fianlly, if you read my post, you will see how I showed that Bernanke and wikipeda were saying the same things, only bernanke in much oilier snake peddler words. So that there is only one version of what QE is, moneyprinting.
Schiff is convinced that we are heading for hyper-inflation, so I am sure his view of the Fed is less than
pleasant.
That being said, I still don’t see why the Fed’s action of creating reserves (as the lender of last resort) only to be
used to buy newly issued debt is considered money printing.
This is not any different than fractional reserve lending. Just like a bank with a deposit of 1,000 and reserve requirements of 10% creates a loan for 900 bucks. It’s balance sheet is now 1,900 bucks. Did the bank create money? I suppose so, but that is the nature of system we live in. I know Rothbard’s opinion was always that FRB was akin for counterfeiting, but within the internal banking system things are less than clear. Still, if all the loans generated are paid back, then no money was actually printed. Agreed?
how do they “create” reserves? they print money and put it into somebody’s bank account, thats how. what difference does it make on what the newly printed money is spent? it’s “creation” is the crime that creates inflation, by definition.
yes, that is the nature of the system we live in. of money being printed constantly, with constant inflation. But it is not a law of nature that this has to be.
within the internal banking system it is very clear. money is printed. the Fed prints the money and gives it to itself. thats very clear.
even if all the loans generated are paid back, there was a gift of printed money that the Fed gives to itself before the loans were made. Take the case of QE2. the Fed is going to print money. stop. that is inflation right there, by defintion. and that printed money will forever be in existence. the Fed will be the owners of that new money. they will then take that printed money and lend it to the US govt. in the hands of the govt, that printed money will still exist. After the govt spends it, it will continue to exist in the hands of the fellow who sold the govt a tank or whatever.
But if Ben is really printing 600 Billion for the purpose of government spending, then we would see this money in circulation really quickly.
The money was already spent. He is buying $600 billion worth of debt. Whether or not there is an increase in the quantity of money in circulation is whether or not the gov. will take the opportunity to spend more.
You are jumping the gun, money loaned out is not inflation. It’s simply not true. If I had a printing press and created 1 trillion dollars, then kept it in my basement, IT IS NOT INFLATION. It is just an act. You need to recalibrate your definitions.
QE1 was similarly marginally inflationary because most of the money lent out to the banks by the Fed was never used.
QE2 is an attempt to get the money moving, but not through the banks, but the Federal government. This is no more inflationary than any bank lending under fractional reserve banking. In fact, it’s less, since these loans do not trickle down to other banks.