General

Re: How the Fed Creates Money

Southern — Mon, 14 Feb 2011 16:19:47 GMT

This might help.

Basicly what happens in open market operations. This would be an example of the FEDs balance sheet.

1.	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).


2.	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 ledge entries increasing its asset accounts and increasing its liability accounts.


3.	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.

Re: How the Fed Creates Money

John James — Mon, 14 Feb 2011 02:30:07 GMT

Also check this thread...

Re: How the Fed Creates Money

Scott Friday — Thu, 10 Feb 2011 06:29:44 GMT

Thanks. I'll give that a looking over.

Re: How the Fed Creates Money

Clayton — Thu, 10 Feb 2011 00:03:53 GMT

From the Horse's Mouth: Modern Money Mechanics

In particular, look at the graph on page 12.

Clayton -

How the Fed Creates Money

Scott Friday — Wed, 09 Feb 2011 23:45:32 GMT

Howdy,

Could someone please point me to a source that gives a clear explanation of how the Fed creates new money? I know it is created from nothing, but what is the process they use to get it into circulation?

Is it just lower banks borrowing from the Fed? Is it the Fed buying assets with created money? Who is involved?