money creation

11 posts / 0 new
Last post
njp's picture
njp
Status: Member (Offline)
Joined: Sep 16 2008
Posts: 6
money creation

When the Federal Reserve buys T Bills with new dollars, do the T Bills disappear or does the Federal Reserve collect interest on the T Bills they own, and receive the principle when due? This question is not addressed in Chapter 7 of the Crash Course. My guess is the T Bills disappear, along with the debt.

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: money creation

njp, T-bills don't "disappear," because they are liabilities of the Treasury, while the Federal Reserve is a separate entity. Whether you own them or the Federal Reserve owns them, the Treasury still has to pay their face value at maturity.

The Fed's current H.4.1 report shows that it holds $476.594 billion of Treasury securities, including $18.423 billion of T-bills.

http://federalreserve.gov/releases/h41/Current/

When the Fed buys these Treasury securities from primary dealers, it credits them with a deposit. From the Fed's perspective, this deposit is liability owed to the primary dealer (or its bank, if the dealer isn't a bank). It shows up in the H.4.1 report in the last line of the balance sheet, "Reserve Balances with Federal Reserve Banks," currently standing at $119.749 billion.

Bottom line, private debt can be extinguished by paying it off or by default. But the cumulative total of public debt, in an era of permanent fiscal deficits, only grows -- by being rolled over, along with issuance of new debt. The Federal Reserve has no power to extinguish public debt -- indeed, the growing interest earnings provide much of its income.

 

njp's picture
njp
Status: Member (Offline)
Joined: Sep 16 2008
Posts: 6
Re: money creation

Machinehead:

Thanks for the response. So if the fed res is collecting  interest, that means that they do not necessarily have to print currency to buy T-Bills. Yet the purpose of buying the bills is to inject new currency into the system, or is it? What do they do with the interest?

njp 

njp's picture
njp
Status: Member (Offline)
Joined: Sep 16 2008
Posts: 6
Re: money creation

More on money creation:

So the federal reserve (a system of a dozen banks?) receives the interest due on the T-bonds etc. that "it" purchases only with newly printed money as stated in chapter 8. So the interest  accumulates as an asset of the fed. Now the fed is giving 800 billion to banks etc. Is that loaned/injected money newly printed or is it from the interest earned? If it is newly printed then big inflation is on the way, no?

What normally happens to the interest earned? Is it loaned out to customers of the Fed banks?

njp 

njp's picture
njp
Status: Member (Offline)
Joined: Sep 16 2008
Posts: 6
Re: money creation

More on money cration:

 

Chapter 8 says that when the fed reserve buys T-bonds that "the Fed simply prints up the money" and that the money is "printed out of thin air". It is the Treasury that prints money. So how does this work? Does the Fed just call or email the Treasury and say "Send us some cash to buy some of your bonds from the banks"? And for the $800 billion "rescue"  program does the Fed ask the Treasury to "print up the money and send to us? Is there actually cash involved? If so who who gets the cash? Is it divided among the 12 Federal Reserve banks? Does the Fed have a bank account? $800 billion is a lot of new cash in the system.....

 

njp 

Malachi's picture
Malachi
Status: Member (Offline)
Joined: Dec 24 2008
Posts: 6
Re: money creation

njp,

You're confusing various forms of money.  The Treasury prints physical money but physical money is a very small portion of the total money supply.  The vast majority of the money supply is non-physical money created out of thin air by the Fed.

For example, my weekly paychecks are directly deposited into my checking account.  My monthly utility bills are deducted straight from the same checking account.  Likewise, I put most of my daily expenses on my credit card which I pay in full at the end of the month through the same checking account.

None of this money is ever in the form of physical money printed from the Treasury.

To answer another question.  When the Fed does need physical money, it pays the Treasury face value for the money (plus the cost of printing it).  So the Fed pays for it.  But today, physical money is really just an instance instantiation of non-physcial money.  If you go to the ATM and draw out $20 you now have a physical $20 bill.  But your non-physical money in your account is deducted by $20.

It's is the non-physcial money which is the 'real' money.

When Chris talks about 'printing money' in the Crash Course, he's being figurative.

 

Malachi's picture
Malachi
Status: Member (Offline)
Joined: Dec 24 2008
Posts: 6
Re: money creation

And for the $800 billion "rescue"  program does the Fed ask the Treasury to "print up the money and send to us?

No.  The Fed doesn't have anything to do DIRECTLY with the 'rescue' or any fiscal 'stimulus'.  The Treasury will print up (not literally print, though some of it might be) $800 billion in BONDS.  It will then sell those bonds on the market.  Those bonds will mostly be purchased by huge banks around the world who will hold them as part of their reserves.

The Fed comes in when it buys some of those bonds from banks in its 'open market operations'. The Fed buys bonds from banks to grow the money supply or to keep the money supply from shrinking as it turns over bonds it holds which have matured.

Malachi's picture
Malachi
Status: Member (Offline)
Joined: Dec 24 2008
Posts: 6
Re: money creation

When I posted I hadn't noticed this thread is 2 months old.  Oh well.

johnsons's picture
johnsons
Status: Member (Offline)
Joined: Dec 29 2008
Posts: 1
Re: money creation

Chapter 8 indicates that the Fed buys bonds which have already been purchased by banks (both US and international banks), why does the Fed buy these bonds?  Is it after the term (one year) has elapsed and the bonds are "due"?  What other reasons does the Fed buy these bonds?

 

Thanks 

yiannis_athens's picture
yiannis_athens
Status: Member (Offline)
Joined: Apr 6 2009
Posts: 1
Re: money creation

Just a question to clarify......

I've seen a couple of times the crash course and also a very good presentation at:

It seems that at the end money is created:

  1. by loans from the commercial banks and also destroyed by the same way
  2. by the government issuing treasuries, which are converted to money by the fed
  3. by loans from the fed to the commercial banks

Is that correct ? (is option 3 also valid ?).

laurens's picture
laurens
Status: Member (Offline)
Joined: Jul 20 2010
Posts: 4
Re: money creation

Printing money increases the money supply, which leads to inflation. This means the prices for everything get higher (including the price of your labor, also known as your salary). If you have money saved, you'll find that that money doesn't buy what it used to, which is bad for you. If you owe money, this is good for you, because you don't need to trade as much stuff to get the money for your debt.

You've got that part.

But if the government buys money from the market, this does not affect the overall money supply, because the government is buying the money with gold or something else that functions as money. It's like getting change for a twenty. You give something and you get something with the same value, but the total supply of money in your wallet doesn't change.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments