The Federal Reserve is >NOT< Printing Money

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The Federal Reserve is >NOT< Printing Money

#1  Postby GT2211 » May 17, 2013 1:51 am

First I would like to say I am glad to see the GOP/corporate think tank AEI finally acknowledge that the GOP inflation fears are wrong distracting from the debate we should be having on how to grow the economy. Unfortunately the AEI still seems to not grasp the mechanics of monetary policy which indicates there is more work to be done.

Now Steve Roth has wrote a very helpful and wonkish post at AngryBear explaining that:
a) The Fed is creating reserves which should not be confused with printing money or you are going to get very confused results
b) Reserves are not 'money sitting on the sideline'
c) Reserve levels have ZERO correlation with inflation rates.

Image


http://angrybearblog.com/2013/05/the-fe ... erves.html






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Re: The Federal Reserve is >NOT< Printing Money

#2  Postby Panderos » May 24, 2013 9:16 am

Lol I thought this might be aimed at me when I saw the title the other day. Only now just noticed that bit at the bottom.

I didn't reply because I'm temporarily bored of this subject. I have a thread in here (the Positive Money one) that I'll come back to when I'm in the mood. If I ever come to understand how the banks/central banks system works to a level I'm happy with, I might come back to this thread...and prove you wrong! :nanana: ..Maybe.
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Re: The Federal Reserve is >NOT< Printing Money

#3  Postby Rick » Nov 03, 2013 4:38 am

Instead of playing around with definitions, I’d only note that more and more papers detail the futility of quantitative easing, quite apart from the distortions induced by way of ballooning asset prices and the ongoing flight of capital from developing nations. The central banks seem to be creating a new house price and share market bubble, in lieu of the struggle in generating real growth.

It furthermore exacerbates social inequality on the part of those who can least afford it. Thus the rich watch their shares (with the US market hitting record highs last week) and property assets gain in value, whilst the poor are encouraged to use the low interest environment as an opportunity to take on more debt, either to buy into the rally itself or to boost personal consumption - an inequality in part disguised by the enormous debt already carried by middle and low-income earners.

This brake on consumer demand, coupled to the endless glut of cheap consumer goods out of Asia, may explain, at least in part, why inflationary pressures remain benign despite ongoing stimulus.
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Re: The Federal Reserve is >NOT< Printing Money

#4  Postby Panderos » Mar 21, 2014 3:14 pm

I think I have a better handle on how banking works now. It seems pretty clear to me that the Fed has been effectively 'printing money'. Assuming it works in the same way as it does in the UK, QE means buying up treasury bonds from non-banks, crediting their deposit accounts (and the banks reserves). Thus adding to broad money. As Rick says above, this money first flows into asset markets pumping up prices and benefiting people and organisations that deal in these things.

It's not necessarily inflationary because much may be used to pay down debt, which reduces broad money. It'll also take time for it to leave asset markets. Edit: Another factor here is that with an output gap - firms not producing what they are able to, such as a factory only running at 75%, even if the broad money supply increased, those firms are likely to just up production rather than raise prices. At least to some extent. In other words the money supply increase causes an output increase and the money supply / output ratio which affects inflation is not increased as much as if output remained constant and the money supply increased.

The justifications for doing it this way seem pretty weak, and certainly unfair. That much ain't news of course:

The Guardian in 2012 wrote:The Bank of England calculated that the value of shares and bonds had risen by 26% – or £600bn – as a result of the policy, equivalent to £10,000 for each household in the UK. It added, however, that 40% of the gains went to the richest 5% of households.


I suspect its a similar story in the good 'ol US of A.
Last edited by Panderos on Mar 21, 2014 4:01 pm, edited 1 time in total.
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Re: The Federal Reserve is >NOT< Printing Money

#5  Postby laklak » Mar 21, 2014 3:28 pm

Bring on the housing bubble! Either I'll make money selling something or I'll pick up something cheap after the crash. I love a win-win.
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