On Wednesday, 3 August 2016 at 13:34:13 UTC, jmh530 wrote:
On Wednesday, 3 August 2016 at 07:35:28 UTC, deadalnix wrote:
And how is this legal tender emitted ? With debt.
Do you mean how money is created?
The Fed and other major central banks use open market
operations like repos or outright asset purchases to control
the money supply. For outright asset purchases, a central bank
buys bonds from commercial banks. The banks then have more cash
on their balance sheets that they can lend. At least this step
results in less debt held by the public. The rest of the
process is that the banks then lend out the money and because
of fractional reserves more and more is created as the money
gets lent.
I agree that debt is used in the money creation process.
However, this doesn't make money debt. However, sometimes debt
can be very money-like, e.g. U.S. T-bills.
Banks in the US haven't been constrained by reserves since the
90s, when regulatory change interacting with sweep accounts, and
so on, meant they could meet reserve requirements using vault
cash held for ATMs. That's why credit growth accelerated and
asset prices went vertical from 1995 onwards.
So QE operates not so much via direct effects on bank reserves
and more via portfolio balance effects - the guy that sold the
bonds to the Fed has to go buy something else - maybe corporate
bonds. And this ripples out and compresses risk premia and has
consequences for the real economy. Whether this is a good idea
is another question.
