On Sun, 2007-11-11 at 08:04 -0800, Jim Devine wrote: > Paul Zarembka wrote: > > > It is true that the > > > Federal Reserve, after printing money, places it on the market at interest > > > (if it is more than the replacement of worn-out currency). > > Laurent writes: > > The fed does not create new money: only private banks do create money > > each time they make a loan and they have this right in exchange for > > following bank regulations. > > Laurent, that's only according to a narrow interpretation of "money > creation." The Fed does not create money (i.e., currency) as in > "printing it" and droppng it from its Milton Friedman Memorial fleet > of helicopters. (Ben Bernanke once suggested that it could, BTW.) > However, it does create -- or rather, increase or decrease -- the > monetary base (the stock of high-powered money). That magnitude refers > to the monetary liabilities of the Fed, i.e., bank reserves and > currency. The Fed can and does increase those, which almost always has > the impact of increasing the money supply. > > And when banks want to convert the bookkeeping entries called bank > reserves into currency, the Fed _will_ print it. This converts one > kind of Fed IOU into another.
To put things into perspective: the Z1 of Q2 2007 says that Fed assets and liabilities are around 0.9 trillions (page 68) and that total outstanding debt is 45 trillions including 7.2 trillions of federal and local government debt the rest being private (page 8). Of course you can label the 2% base "high powered" money but for all practical purposes the remaining 98% are money too and they've been printed by private banks not the Fed :). Laurent PS: the astute reader will have noticed that USA fed/gov debt makes 99.99999% of the headlines and papers but count for less than 20% of total USA debt, the other 80% is unknown to MSN and most economists. One sector debt has (nominally) doubled in the last 8 years and just reached 100% of GDP without "anyone" noticing.
