It's All One Bubble (opens in new tab)

(dcahn.substack.com)

1 pointsdevops0001y ago5 comments

5 comments

3 comments · 1 top-level

cs7021y ago· 2 in thread

IRL, whenever anyone tells me that the Fed's "money printing" is "causing" this or that other thing, I always ask: "OK, tell me how the 'printed money' ends up in people's hands, and why and how it causes bubbles and inflation like you say." Typically, the response I get is a deer-in-the-headlights blank stare.

In fact, the Fed cannot "print money." Only the US Treasury can, and it must first borrow the money or collect it in taxes. The Fed only buys/sells government/agency bonds in the open market, lends money to banks when those banks ask for it, and changes short-term rates.

To paraphrase H. L. Mencken, all these "money printing" narratives that blame the Fed for some economic malaise are simple, appealing, and wrong.

foxyv1y ago

It's a reserve system. Money is generated by banks lending more than they currently hold. The Fed lends money to the banks which is then multiplied 10-20x by the bank effectively "Printing money." This is the same way that banks were historically able to turn 1lb of gold into 10lbs of gold notes. The Fed is responsible for setting reserve requirements and the FDIC insures bank accounts.

Right now the Fed has set reserve requirements to 0% effectively allowing banks to print unlimited money so long as they can cover their withdrawals and interest payments for Fed loans. The money isn't ACTUALLY printed, it is lent out as a number in a ledger.

https://www.federalreserve.gov/monetarypolicy/reservereq.htm

cs7021y ago

Financial institutions cannot force customers to borrow.

Customers must first ask to borrow. Their collective behavior determines the multiplier.

Customers = individuals and private non-financial organizations.

Since the financial crisis, their collective behavior has caused the multiplier to drop significantly in the US:

https://fredblog.stlouisfed.org/2023/07/the-monetary-multipl...

https://fred.stlouisfed.org/graph/?g=13oHw

I'm very skeptical of simple, appealing narratives.

1 more reply

j / k navigate · click thread line to collapse