We conclude our discussion on why everyone should understand money creation, including a framework to help you decide when money creation is legitimate and when it is not.
I apologize for missing this question months ago. Here is my answer.The speaker gets it 90% right, but the last 10% is deadly. He claims only new bank reserves are created under QE or open market operations. But the fact is, new reserves AND new money (spendable in the economy by the seller of the bond) are created in equal amount. From a Federal Reserve paper:It is the bank loans, they believe, that are the source of new money in the economy. If the banks do not lend,, they believe, there is effectively no increase in the money supply.
But this is just wrong, and has always been wrong. I quote from a paper by Scott E. Hein of the Federal Reserve Bank of St. Louis, “Deficits and Inflation,” March 1981.
“When the Federal Reserve wants to increase bank reserves, for example, it contacts dealers or financial institutions that are willing to sell their government securities. In exchange for the securities, the Federal Reserve credits the financial institution’s commercial bank with additional bank reserves equal to the value of the securities. The commercial bank, in turn, credits the institution’s account. The net result is that the Federal Reserve has more government securities, the commercial bank has larger reserves, and the dealer has larger deposits with the commercial bank. Both bank reserves and the money stock have increased. In addition, the commercial bank finds that it is holding reserves in excess of what it is required to hold. Thus, the bank can lend this excess to borrowers, further increasing the money stock.” In addiiton, the very Bank of England paper he cites toward the end states clearly that QE creates both new money (bank deposits) and new reserves (a bank assets) at the same time. His idea of "inflation" is higher consumer prices. But most of the money created by QE stayed in the investment world,, which is why the inflated prices were mostly confined to stocks, bonds and real estate.
I apologize for missing this question months ago. Here is my answer.The speaker gets it 90% right, but the last 10% is deadly. He claims only new bank reserves are created under QE or open market operations. But the fact is, new reserves AND new money (spendable in the economy by the seller of the bond) are created in equal amount. From a Federal Reserve paper:It is the bank loans, they believe, that are the source of new money in the economy. If the banks do not lend,, they believe, there is effectively no increase in the money supply.
But this is just wrong, and has always been wrong. I quote from a paper by Scott E. Hein of the Federal Reserve Bank of St. Louis, “Deficits and Inflation,” March 1981.
https://files.stlouisfed.org/files/htdocs/publications/review/81/03/Deficits_Mar1981.pdf
“When the Federal Reserve wants to increase bank reserves, for example, it contacts dealers or financial institutions that are willing to sell their government securities. In exchange for the securities, the Federal Reserve credits the financial institution’s commercial bank with additional bank reserves equal to the value of the securities. The commercial bank, in turn, credits the institution’s account. The net result is that the Federal Reserve has more government securities, the commercial bank has larger reserves, and the dealer has larger deposits with the commercial bank. Both bank reserves and the money stock have increased. In addition, the commercial bank finds that it is holding reserves in excess of what it is required to hold. Thus, the bank can lend this excess to borrowers, further increasing the money stock.” In addiiton, the very Bank of England paper he cites toward the end states clearly that QE creates both new money (bank deposits) and new reserves (a bank assets) at the same time. His idea of "inflation" is higher consumer prices. But most of the money created by QE stayed in the investment world,, which is why the inflated prices were mostly confined to stocks, bonds and real estate.
Jim, what is your opinion of the following: https://www.youtube.com/watch?v=K3lP3BhvnSo&ab_channel=BenFelix ?
He says that the FED printing "money" for QE is unlikely to cause inflation...?
Amazing!