Economics Questions

Re: Bernanke claims he is not printing money.

Zangelbert Bingledack — Fri, 10 Dec 2010 18:35:02 GMT

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?"

Re: Bernanke claims he is not printing money.

cr113 — Fri, 10 Dec 2010 17:40:44 GMT

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.

Re: Bernanke claims he is not printing money.

Smiling Dave — Fri, 10 Dec 2010 15:06:34 GMT

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?

Re: Bernanke claims he is not printing money.

Smiling Dave — Fri, 10 Dec 2010 14:45:32 GMT

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.

Re: Bernanke claims he is not printing money.

Autolykos — Fri, 10 Dec 2010 14:29:50 GMT

Kaz, how are you defining "real money" and "real money supply" in your post above?

Re: Bernanke claims he is not printing money.

Isaac "Izzy" Marmolejo — Fri, 10 Dec 2010 07:22:30 GMT

The fed is printing money... why would you believe Ben?

Re: Bernanke claims he is not printing money.

Kaz — Fri, 10 Dec 2010 06:37:25 GMT

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/

Re: Bernanke claims he is not printing money.

SirThinkALot — Wed, 08 Dec 2010 17:06:18 GMT

I liked Jon Stewart's bit on this last night. Did anybody see it?

Re: Bernanke claims he is not printing money.

Southern — Wed, 08 Dec 2010 16:42:19 GMT

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:

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 ledger 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.

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.

Re: Bernanke claims he is not printing money.

cr113 — Wed, 08 Dec 2010 16:10:48 GMT

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.

Re: Bernanke claims he is not printing money.

A.L.Pruitt — Wed, 08 Dec 2010 06:38:19 GMT

To Clayton and Vitor....

Bernanke smokes rocks?

Waiting for someone with photoshop skills to whiten Bernanks lips and give him a red beanie.

Re: Bernanke claims he is not printing money.

Vitor — Wed, 08 Dec 2010 05:17:37 GMT

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.

Re: Bernanke claims he is not printing money.

Clayton — Wed, 08 Dec 2010 03:35:53 GMT

Tangent: You noticed how his lip quivered and he seemed really nervous through that interview?

Yeah, I did! WTF was up with that??!?

Clayton -

Re: Bernanke claims he is not printing money.

BrianAnderson — Wed, 08 Dec 2010 03:18:52 GMT

Brian: The Fed orders cash from the Bureau of Printing and Engraving.

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.

Re: Bernanke claims he is not printing money.

Stranger — Wed, 08 Dec 2010 01:18:08 GMT

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.