Presto! More Money!

I’m taking a macroeconomics course at UW Waukesha and it’s amazing the things I’m learning.  Like where money really comes from (hint: not a printing press!).

Take this, for example, from the textbook Macroeconomics: Principles and Policy by Baumol and Blinder.

You may be wondering where the Fed gets the money to pay for the securities [it purchases in an open market operation].  It could pay in cash, but it normally does not.  Instead, it manufactures the funds out of thin air, or more literally, by punching a keyboard.  Specifically, the Fed pays the banks [it is purchasing the treasury bills from] by adding the appropriate sums to the reserve accounts that banks maintain at the Fed.  Balances held in these accounts constitute bank reserves, just like cash in bank vaults.  Although this process of adding to bookkeeping entries at the Federal Reserve is sometimes referred to as “printing money,” the Fed does not literally run any printing presses.  Instead, it simply trades its IOUs for an existing asset (a T-bill).  But unlike other IOUs, the Fed’s IOUs constitute bank reserves and thus can support a multiple expansion of the money supply jast as cash does.

Am I the only one that finds this fascinating?  So this is how QE works “on the ground.”


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3 thoughts on “Presto! More Money!

  1. Yeah it is fascinating. QE was literally a handful of Fed workers sitting in a dingy room at a banquet table and punching keys on the computers, transferring balances when they got bids they liked. I read an article about their Wall St counterparts sitting in a (probably gold plated) room trying to outsmart them on prices.

    Also: disturbing.

  2. Is that why Ben Bernake is always wearing a ‘con-man’ smile?
    Don’t forget that even Bernie Madoff (Madhoff?) said (not an exact quote) THE FED is the one that’s running the biggest Ponzi Scheme. Also, check out what Gerald Celente & Bob Chapman (both have Youtube channels & are highly regarded by many on the subject of the economy) have to say about the FED & the like. Also, watch a video (on Youtube) called: ‘The Secret Of OZ’ which does a very good job at explaining what a con the debt-based money system is.

    1. I think that you misunderstand my post. I was simply remarking on how the money supply is managed through the creation and destruction of money through the reserve process. It’s not, in any sense, a Ponzi scheme. You don’t seem to understand what that expression means. The Fed doesn’t look even slightly like a Ponzi scheme.

      But understanding the money process, how it works and why it’s necessary is important to understanding how monetary policy works and how it should be applied.

      Gerald Celente is a fool of the first order who is certainly not a “highly regarded” expert on the economy. He’s a huckster and a charlatan. Bob Chapman is an old trader who has little understanding of the macroeconomy and his foolish believe in a “strong dollar” would be comical if it weren’t so pathetic. You need better sources. Seriously.

      Conspiracy theories were fun when I was 14, but I’m over them now.

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