‘We print money digitally’ – so says the Fed

The current Chairman of the Federal Reserve bank of the USA – otherwise known as the US Central Bank, says that Central Banks have have the ability to create money digitally … and also print actual currency.

This really could be not more obvious that this is THE MAGIC MONEY TREE that we have always been told does not exist…

All the more so as the US system is based on that of the first central bank, the Bank of England:

Apologies that I could find a relevant link only with somebody mentioning Bitcoin! Never mind monetary policy, which really is simply about supply…

Although, as is quite rightly implied, with Bitcoin of course, you are unlikely to be able to pay any tax…

Comments

  1. Samuel Johnson -

    Magic Money Tree as an alternative name for Modern Money Theory seems a very mixed message to me. I needn’t rehearse why it’s appropriate on one hand here, but I can’t help thinking that: most people know there’s no such as magic, and just about everybody has learned that money doesn’t grow on trees. My guess is that the term would cause many to dismiss the concept without engaging with because it conflicts with “good old British common sense”.

    I wonder if something like Renewable Finance wouldn’t be both harder to dismiss and more appealing to the demographic concerned about climate change and environmental destruction?

    1. Peter May -

      A fair point.
      Needs thinking on…

  2. Andrew Dickie -

    How about SGF, standing for “Sustainable Government Finance”?

    “Renewable” is a great word, but doesn’t cover the idea of being “within our means”. We know that ” within our means” is pretty much a nonsense for a government with a fiat currency, but the ordinary man and woman in the street have been taught to beware of government profligacy.

    “Sustainable” seems to me to meet that concern, and “Government Finance” locates the matter where it mainly plays out (though not entirely, as the whole banking and finance apparatus that actually hangs off government finance is also part of it) – with the political managers of the economy, and not with buckpassing ideas such as “the invisible hand” and “the market”.

    1. Samuel Johnson -

      I like it. In fact I almost suggested it, (sustainable, that is; government is a useful qualifier).

      Come to think of it, I can’t think of when I last heard of any objection to the “magic of the invisible hand,” but magic is a good thing to get away from I think.

      1. Peter May -

        I like it too!

  3. B Gray -

    FYI – Additional relevant quotes from the U.S. Federal Reserve:

    St. Louis Federal Reserve Bank: “As the sole manufacturer of dollars whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e. unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar denominated assets”

    Alan Greenspan (1997):Government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claim without limit

    Alan Greenspan (2005 Congressional Budget Hearing in response to question from Paul Ryan, US Rep, regarding Social Security solvency): “Well, I wouldn’t say that the pay-as-you-go benefits are insecure, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody”

    Ben Bernanke (2009 60 Minutes interview): “[QE] It’s not tax money, we simply use the computer to mark up the size of the account”

    Ben Bernanke: (2002 Remarks before National Economists Club) “the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

    Mainstream media doesn’t like to widely report as is runs counter to the neoliberal narrative supported by Wall Street and major media conglomerates. You can Google the quotes if you wish to find relevant links.

    1. Peter May -

      Thanks for that – all useful information…

  4. Michael Green -

    The Government has not created extra money, it has simply printed money to partially replace the money that disappeared back into thin air during lockdown. If someone thinks money has not turned back into thin air, where do they think it is? If there was approximately the right amount of money in the system before lockdown, there certainly will not be too much afterwards.

    1. Peter May -

      That’s fair – although some of the disappearance will be a reduction in exchange – the so called velocity of money.

  5. Magpie -

    @Peter May

    Hi. As an Australian, I can’t say I’ve been following the American news closely. So, I’ll beg your patience with these two questions, which may sound incredibly silly:

    (1) how is the US Federal Government funding its COVID-19 response?
    (2) is QE being applied and, if it is, how?

    I ask because the Reserve Bank of Australia has also admitted “printing money”, meaning it’s creating fiat money digitally. They are using a version of QE, where banks act as intermediaries between the Government and the RBA, as opposed to the RBA buying bonds directly from the Government.

    American readers could find this speech, by Philip Lowe, RBA Governor, interesting:

    https://www.rba.gov.au/speeches/2019/sp-gov-2019-11-26.html

    Thank you.

    1. Peter May -

      As far as I’m aware the US government is relying on the Fed to create the money. They have also undone the QE that they started to unwind as in reverse. But, like you I’m afraid I don’t follow American news closely – Trump makes it particularly difficult to know what is what!

      Your RBA version of QE would probably be improved (as could the BoE’s) by perpetual bonds which the RBA could buy up and keep!
      Discussed here:
      https://www.taxresearch.org.uk/Blog/2020/05/05/question-of-the-day-should-we-be-issuing-perpetual-bionds-to-fund-the-green-new-deal

    2. B. Gray -

      Magpie;

      Since I am from the US, I can speak directly to your questions. US is funding its COVID-19 response primarily through both fiscal and monetary stimulus in the form of direct payments to individuals and businesses, tax credits, as well as low interest loans. Fiscal stimulus (CARES Act) is new spending that has been authorized by congress and will result in a net increase in the fiscal year deficit and debt (i.e. net savings in the private sector). At some point after this is over, our Republican party will create an artificial crisis over the debt and will demand cuts to entitlement spending, but for now the deficits are a necessity.

      From a monetary policy standpoint, U.S Federal Reserve is using various monetary tools, including QE (primarily in the form of purchasing treasury securities and commercial/residential mortgage-backed securities), to maintain the federal funds rate in the range of 0 to 0.25%.

      Strictly speaking, QE isn’t printing new money, it is an asset swap to increase the liquidity of banks and to lower interest rates by increasing the amount of excess reserves in the banking system. At some point the central bank would unwind their asset portfolios, thereby removing the excess reserves that were created when the assets were initially purchased.

      If the central banks were to buy new securities directly from the treasury, that would be “printing new money”. Under normal circumstances, central banks don’t like to do that (and laws often prohibit), as it makes it more difficult to hold to their target interest rates. Direct purchase of securities would result in new government spending going directly into the money supply without an offsetting drain, putting continuous downward pressure on interest rates.

      Treasury securities for monetary sovereigns are not a fiscal requirement of their governments to deficit spend. Their purpose is to provide a secure dollar/pound denominated asset for the private sector, as well as a mechanism through which the central bank can control interest rates via the monetary base money supply.

      Hope that helps.

      1. Peter May -

        B Gray – Thanks a lot for that insight.
        As you say, I’m sure the Republicans will be creating a crisis at the first political opportunity!

  6. Magpie -

    Thank you, Peter May and B. Gray, for your answers, which sound quite similar with things here (particularly the all-too-predictable future fake debt crisis).

    Just a doubt. B.Gray writes “U.S Federal Reserve is using various monetary tools, including QE (primarily in the form of purchasing treasury securities).” Can I take it that the answer to the question “is the Fed buying treasuries directly from the U.S. Federal Government” is yes?

    Thanks again, guys!

    1. Peter May -

      Cannot remember how it is done in the US but in EU countries direct purchase is illegal, which is why the Bank of England had to set up a special purpose company to do the job.

    2. B. Gray -

      Magpie, sorry for late reply. No, the Federal Reserve is prohibited from buying securities directly from the US Treasury per the Federal Reserve Act, and must purchase on the open market. However, since the Federal Reserve has offered to buy any and all treasury securities in response to COVID-19 crisis, there is currently little practical distinction between buying on the open market and buying directly from Treasury, as the open market is merely a “pass through” for new deficit spending/treasury issuance.

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