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?
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?
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Kaz, how are you defining "real money" and "real money supply" in your post above?
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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.
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Kaz, welcome to the forum.
1. Maybe Hayek thoiught money supply is quantity times velocity, but most Austrians disagree. Not only that, Uncle Wikipedia disagrees. So does the Fed So that Bernanke was, I imagine, using the Fed definition of money supply, not Hayek's.
2. The money is not stagnating in the bank's reserves. They are lending it to the Us Govt, who, you can be sure, is not wasting any time spending it.
3. About the money having to be paid back, and thus "destroyed". First of all, in QE1, tons of that money was not lent at all. It was givrn to the banks in exchange for all kinds of paper assets of questionable value. IN QE@, the money is going ot be lent to the US govt. How do you think the govt will repay the Fed? With existing money? Of course not. It will have the Fed porint new money to pay back the loans, and of course the interest. So that the QE2 money is never going to "cease to exist", quite the opposite, it will expand and expand.
4. You say "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 huge IF in that one, the size of an elephant. Who says the Fed will be able to sell those bonds and notes? If those bonds and notes are so attractive, why did the fed have to buy them? Why were they not snapped up on the open market?
Smiling Dave: "You say "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 huge IF in that one, the size of an elephant. Who says the Fed will be able to sell those bonds and notes? If those bonds and notes are so attractive, why did the fed have to buy them? Why were they not snapped up on the open market?"
I agree but I want to add something else. It seems to me that the Fed could theorectically remove the money it adds if it bought a real asset that didn't lose value. But I think when the Fed buys bonds all it can do is TEMPORARILY remove the money because when the bond matures money has to be "printed" to give to the bold holder.
2 scenarios:
1. Fed prints $100 and buys a silver coin. Monetary base is increased by $100. A year later Fed sells silver coin for $100 and "burns the money". Monetary base is now decreased by $100. Monetary base is back to what it started as.
2. Fed prints $100 and buys bond. Monetary base is increased by $100. A year later Fed sell bond for $100 and "burns the money". Monetary base is decreases by $100. Another year later bond matures and $120 is printed and given to bond holder. Monetary base is increased by $120. Monetary base has been permanently increased.
So in my opinion the Fed buying debt is worse than when it buys hard assets because it can't undo the damage.
the bernank looked like a guilty child in that interview. his face was subcommunicating "i am just going to tell you this shit and it's going to be ok, right? right?"