The generation of quantitative easing: how the Fed makes money out of thin air

This article comes from News.bitcoin.com , the original author: Jamie Redman

Odaily Planet Daily Translator | Moni

In 2019, we are coming to an end. In the coming year, we have seen some countries adopt an expansionary monetary policy. According to incomplete statistics, about 37 central banks have implemented loose monetary policies. But unfortunately, most people don't understand what the central bank like the Fed has used to increase the money supply, and they don't spend too much time to understand the process. So here, we intend to analyze in depth how the Fed or other central banks “printed money” by increasing bank deposit credits, lowering the federal funds rate target, and operating large-scale purchases of securities and government bonds in the open market.

Continuous debt cycle: managing federal funds rates to stimulate more loans

In 2019, the Federal Reserve, the European Central Bank (ECB), the Bank of Japan (BoJ) and many other centralized currency agencies adopted large-scale monetary easing. In fact, whenever these monetary easing measures are implemented, people will compare the Fed to a “printing machine” and believe that the Fed will only print money. But in fact, the Fed has never used the press to issue even a $100 bill because the operation was done by the US Treasury. In fact, there should not be too many people using tangible cash to make payments now.

Above: According to the financial blog “Zerohedge” analysis data, in August 2019, the US real money broad money supply (TMS-2) year-on-year growth rate has dropped to 1.87%, hitting nearly twelve New year low.

The Fed can indeed increase the money supply, but it can also be done electronically and through some of the smaller credit institutions of financial institutions. When inflation weakens consumer purchasing power, the market will need more money, and the available money supply (liquidity) will fall even lower. When the Fed's subordinate banking network (usually small) claims that the reserves are insufficient, they will take responsibility for managing liquidity in the US market. As more and more complaints from small and medium banks, the Fed eventually had to adopt an expansionary monetary policy to stimulate credit, investment and overall growth.

Above: In the previous month of this writing, the US Treasury’s funds in the Fed’s general account have increased significantly ($195.5 billion on August 19 and 330.3 billion on September 30). USD).

What you need to understand is that these newly created funds will never flow into the hands of ordinary people, they just want to help (or fund) the banking industry. If you understand this, it will help people better understand how the monetary system is manipulated today.

One of the primary strategies the Fed uses to stimulate the economy is to manage the federal funds rate. When the Fed wants to create more liquidity, the central bank will reduce the amount of money the bank needs to reserve each night. The federal funds rate is the interest rate of the US interbank market, which is the rate that banks are allowed to charge to other financial institutions, the most important of which is the overnight lending rate. This change in interest rate can sensitively reflect the lack of funds between banks. The Fed's targeting and adjustment of interbank lending rates can directly affect the capital cost of commercial banks, and transfer the remaining funds of the interbank borrowing market to industrial and commercial enterprises, thereby affecting consumption. Investment and the national economy. Although the adjustment of the federal funds rate and the rediscount rate is announced by the Federal Reserve, its methods have administrative regulations and market effects, and the effects of regulation and control are also high and low. This may be the federal funds rate gradually replaced and discounted. An important reason for the rate and play a regulatory role. This can be a bit of a problem, because when smaller banks demand lower Fed rates, they actually want to express that their money supply is not enough to maintain their solvency.

The above picture shows a bank with insufficient reserves and low liquidity, urging the Fed to regularly increase after-sale assistance.

If a bank lacks liquidity, they can actually borrow funds approved by the US federal government from another bank. The federal funds rate is basically the interest rate used by this lending business. However, the interest rate designed by the Fed has been used in a “disguised” manner for home loans in the United States, becoming the benchmark interest rate for loans, mortgages and credit card debt. In fact, after the federal funds rate is lowered, ordinary people will not see many benefits unless they are borrowers. When the Fed lowered the federal funds rate target, they essentially wanted to add credit to bank deposits, making the bank want to release more loans. When consumers are unable to pay their debts, this vicious circle will continue, and banks will issue more loans to stimulate consumerism and allocate more debt.

Above: During the 2008 economic crisis, the US Federal Reserve rescued the ordinary people in the streets. With the standardization of monetary easing, no one has ever made a real protest against quantitative easing.

Expansionary monetary policy, or create credit out of thin air

Another way the Fed uses to control the economy is to use the so-called quantitative easing measures to implement an extended monetary policy. When the Fed uses open market operations to buy large-scale assets from banks, it is actually equivalent to “printing money” because it is equivalent to creating funds out of thin air, but only through credit and electronically. Ordinary people do not see new currency issues, and those who provide predatory loans are very welcome to implement the quantitative easing policy.

So, how does the Fed play this game?

When the Fed participates in overnight repo and open market operations, it buys US Treasury bonds and other securities from a select group of member banks. The Fed actually creates credit out of thin air and then converts credit into government bonds and other assets. This, in turn, provides more lending funds to smaller banking institutions that typically lower their lending rates. When banks sell credit cards with interest, car loans, home loans, and student loans to people who are willing to borrow, these fresh capital is deposited by the bank. Since the establishment of the Federal Reserve in 1913, they have used this so-called trickle-down economics, but this process has never improved the economic status of the middle and lower classes. (The Planetary Note: The economics of 涓 通常 is often used to describe Reagan's economics, because the economic policy implemented by the Reagan administration believes that government relief is not the best way to help the poor, and that economic growth should increase total wealth and ultimately benefit the poor. The term originated from the American humorist Will Rogers, who said in the Great Depression: “Give money to the upper class, hope it can flow to the poor.” (money was all Appropriate for the top in hopes that it would trickle down to the needy. The term economics is not an academic term and is ironic.)

Above: Austrian economist Murray Rothbard explains how the central bank makes money and manipulates the global economy in his book The Case Against the Fed.

On the other hand, the Fed will also purchase large-scale purchases of assets such as US Treasury bonds and securities from its member banks that lack liquidity. This will create an illusion for the market that people think that the Fed is facing a financial institution that is on the verge of bankruptcy and many are in trouble. The bank has confidence. In the book The Case Against the Fed, written by Austrian economist Murray Rothbard, explains why the loss of the federal reserve that does not exist is increasing. He writes:

“Assume that the central bank buys assets from commercial banks. For example, if the Fed buys a property owned by Jonesville Bank for $1 million, the property is valued at $1,000,000, then the original belongs to Jones. The assets in the bank's asset list are transferred to the central bank's asset list. So how does the Fed pay the money? It's simple, they issue a $1,000,000 check."

But the question is, where did the money come from?

Murray Rothbard, the Austrian economist, added that:

“The Fed created the money out of thin air. They created a $1,000,000 inventory receipt and then let Jonesville deposit the check into the central bank, meaning they added $1,000,000 to the central bank's deposit account. Jones The Bank’s total reserves in the Federal Reserve increased by US$1,000,000. On this basis, the bank and other banks will be able to double their inventory income in a short period of time. These non-existent reserves are The US money supply has increased."

Anti-economics "puncturing" the Fed's fake game

In his book, Murray Rothbard pointed out that if the US government could not resist the temptation to print money, it would lead to a large number of new currencies in the market, which in turn caused currency inflation, and society would therefore not trust the purchasing power of legal tender. Although ordinary citizens in the past could not do anything to stop the currency manipulation system, they may now be different. They can use anti-economics to avoid getting into the crisis of legal currency inflation, such as using digital currency, precious metals and other barter trade methods. .

Some liberals believe that once the American people realize their "deception" in the future, the free market economy will win, and the economic system controlled by the Fed will collapse. At this point, individuals and businesses can be freed from the failed currency order created by the Fed. The only realistic way to solve the world economic problem is to completely eliminate the Fed’s money-printing plan.

Murray Rothbard concludes at the end of the book:

“There is only one way to eliminate long-term inflation and eliminate the prosperity and depression caused by this inflationary credit system, which is to eliminate the false dollar that constitutes and cause inflation, and the only way is to abolish the system of legally issuing additional dollars. That is, abolish the Fed system."