What Does Printing Money Mean?

16 Comments on What Does Printing Money Mean?

1. objectivistGuy on November 24, 2008
   
    

   The FEDs have been selling treasuries rather than buying them. Therefore, to that extent, they have been draining money from the economy. Right now, there’s a flight to the safety of treasuries.

   The FEDs have then lent this money out via various facilities. Most of it lent out on a fairly short term basis, but renewed all the time. In normal times, when the money is lent out, banks will use it to make loans. However, in these times of fear, they are not doing so readily.

   Secondly, reserves are only one criteria that a bank will use to determine its lending. The other is its capital position. After taking loss after loss, banks (and all the other financial companies that are now just like banks) are in no mood to take the money they borrowed short-term from the FED and “multiply” it further.

   In a nut-shell, while reserves have been boosted, they’re “nervous reserves”.
2. akb on November 24, 2008
   
    

   It is surprising to see continued demand for treasuries and a strengthening dollar. Who would have thought that a financial crisis of the US’ doing and a flood of dollars would reverse the long slide in the value of the dollar? I could be that markets are behaving irrationally and that when they come to their senses the dollar will plummet.

   I also wonder about the effect of the stimulus package that China has announced. I assume that to spend $500B it will have to sell some of its huge hoard of dollars that its sitting on. That could go some way to decreasing demand.
3. Ted on November 25, 2008
   
    

   If I’m understanding that chart correctly, the amount of dollars in circulation has now about doubled in a month?

   Where is that money now?

   What does this mean to my proverbial $10,000 in savings? Did it just become worth on $5,000 but it doesn’t know it yet?

   That chart scares the hell out of me. I feel like someone or some people just got $650 billion dollars. Who? Why?

   I don’t understand.
4. zanon on November 25, 2008
   
    

   Paul:

   There is no difference between printing more money and issuing more debt. Any money that the Federal government issues *is* debt, in the sense that it is created by debiting a t-table in one account, and crediting a t-table in another account. In fact, if the Government is *not* in deficit, private sources are *unable* to net save.

   Krugman, like most people, has no sense for how Federal Reserve economics work. Suffice it to say, being a currency issuer is completely different from being a current user, and the intuitions one brings from running a household to a business are not useful when thinking about the Federal Reserve.
5. phoenix1rising on November 25, 2008
   
    

   Krugman doesn’t have a clue. He won his Nobel because he bashed Bush not because he knows economics. His comment about the U.S. and “a lot of opportunities for tax revenues” shows that he has absolutely no understanding of history. Raising taxes leads to a decline in tax revenues…lowering taxes leads to higher tax revenues. Even JFK understood that. If President Obama listens to the likes of Krugman and his ilk he will be a one term president…guaranteed.
6. Paul Krugman on November 26, 2008
   
    

   Okay I’m not really Paul Krugman, but I am going to defend him vs. some of these comments. Phoenix1 needs to do some research – or at least get some facts right. I googleed “tax revenue as a percentage of GDP” and the first two results are recent-term proof that “raising taxes leads to a decline in tax revenues” is an inaccurate statement.

   http://www.oecd.org/dataoecd/6/63/1962227.pdf
   1975 highest tax rate = 70%
   1985 higest tax rate = 50%
   Then by 1990 the highest was only 28% and you see only a slight change positively in tax revenue. And what started bringing back the revenues to pre-1975 levels and greater? Answer: Clinton raising taxes in the ’90s. The US has an astronomical amount of room to raise taxes and produce more tax revenue. See how we compare to other countries:

   http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP

   In that respect, Krugman is right that there are a lot of opportunities for tax revenue. We are currently at historically low levels: http://www.truthandpolitics.org/top-rates.php
   You can not tell me that if Obama were to raise taxes to 50% (he won’t) then our GDP would fall so much that the tax revenue increase would be negligible. It would be HUGE.

   To finally answer your question about the difference between printing money and lending money. There is a huge difference. So far the Fed is taking assets onto their balance sheets that ultimately they can sell back out. When they do, this will be monetary tightening as they can take back in possibly big profits (or at least break even) in the form of cash. They can decide what to do with this cash, but if the economy has recovered they will likely keep it, hence tightening the money supply. The Fed has not been just creating money. If this was the case, you would see the Treasury issue bonds and the Fed would be buying them. This hasn’t been done yet, although it could if things get worse.

   This is where the prognosticators may be wrong by predicting hyperinflation when all this is over with. Not only will the demand not be there to drive inflation for years, but as stated above, the Fed can easily shore up the money supply after they sell off the assets they’ve bought (whether it be stock in banks, mortgages, or whatever else). If those assets happen to be worth less than what the Fed is buying them for, then all they have done is essentially inject that difference into the system. That difference could then be considered “creating money,” but nothing more than that.
7. zanon on November 26, 2008
   
    

   Krugman does not have a clue, but phoenix1rising is wrong — we are not on the side of the Laffer curve where lower tax rates will net higher revenues.

   When Krugman talks about stimulating with one hand, and raising taxes (which reduces aggregate demand — the OPPOSITE of what he claims is the right thing to do) it reveals that he really has no idea what he’s talking about.
8. Pelon on November 27, 2008
   
    

   “What’s the difference between receiving 50 $20 bills and receiving a $1,000 Treasury bill? What’s the real difference between issuing more debt and printing more money?”

   One of the major differences is that currency is issued by the Federal Reserve, and debt is issued by the US Treasury. While they often work together, they are not the same organization. The Treasury has an obligation to repay its debt on a fixed schedule and at a fixed price. It does not have the ability to create the currency required to do so. It can get the currency through taxing its citizens, getting loans in the form of new debt, etc.

   The Federal Reserve has no such obligation with its currency bills. If you are not happy with your $20 bill, you can exchange it for two $10 bills, but you can’t exchange it for a Euro, a Treasury bill, or anything else unless the Fed agrees to do so. It isn’t a true IOU because there is no obligation to exchange it.

   When most people think of the government “printing money”, they conjure up images of the government running the printing presses non-stop to meet their obligations. Since the US Treasury doesn’t have this right, they can’t truly “print money”. They can, however, conspire with the Fed to do so by having the Fed buy their debt.

   I listened to the whole interview, and what was said was very misleading. I think that is mostly because the interviewer wasn’t very interested in monetary policy, and Krugman didn’t elaborate. My understanding is that the Fed is selling off its Treasury securities (which contracts the money supply,) but, at the same time, it is also buying up non-government assets such as loans backed by Fannie Mae (which expands the money supply). The buying far exceeds the selling, so you are seeing the money supply grow. You could call this “printing money” since the Fed has increased the money supply by issuing more dollars, but Krugman is probably referring to debt monetization where the Fed conspires with the Treasury to increase the available money. I also don’t think he was advocating increasing taxes in the short term. I think he was merely arguing that people from around the world are willing to lend us money because the US economy appears to have the capacity to repay it by increasing taxes in the future.
9. Pelon on November 27, 2008
   
    

   Ted,

   Right now, you don’t need to be worried about the increase in the money supply affecting your savings. The supply of money has gone up significantly, but the use of money has also dropped significantly. This drop in the use of money offsets the increase in the money supply when establishing price levels. It will only be a problem if the Fed is unable to reign in the money supply once people start using money again.
10. TFB on November 29, 2008
    
     

    Pelon – You gave the best answer. Thank you for clearing it up for me. And thank you for confirming that Krugman was misleading. I felt that way after listening to the interview. I just didn’t know how or where.
11. jimslade on January 20, 2009
    
     

    I’m really late in commenting here but find the discussion interesting and cannot help myself…
    Pelon is indeed correct. The ‘use of money’ is also called ‘turnover’ or ‘velocity’. and the supply times the ‘velocity’ is nominal GDP.
    Uncle Ben & team are trying to stop a drop in GDP by raising the supply… but the velocity is going nowhere…
    great discussion btw.
    jim
12. John on January 30, 2009
    
     

    Pelon, I’m a little confused by part of your analysis. How does the Fed selling off its Treasury securities contract the money supply? It would seem to me to do the opposite. -john
13. Pelon on January 31, 2009
    
     

    John,

    The simple explanation is that you can’t spend a Treasury security, so it isn’t cash. If you give cash to the Fed in exchange for a Treasury security, your ability to spend has been reduced. Here is an explanation using an overly simplistic example of how the process works:

    Jose has $500 in cash. The Fed has $1,000 in Treasury bonds. Cash held by the public is counted in the supply of money calculation, but the Treasury bonds are not. To start with, the total supply of money equals $500.

    The Fed decides that there is too much money in the economy. They think $400 is the appropriate level so they decide to get Jose to give them some of his cash. They offer to sell him $125 worth of treasury bonds for that $100 in cash. Jose accepts the deal and now has $400 in cash and $125 in Treasury bonds. The Fed has $100 in cash and $875 in Treasury bonds. We don’t, however, include the Fed’s $100 in cash in our money supply calculation (and in fact, they may simply burn the cash). The total supply of money has now been reduced to $400.

    If the Fed now decides that the supply of money should be $600, they simply reverse the transaction. They print $200 in cash and buy $125 in Treasury bonds from Jose. Jose now has $600 in cash, and the Fed again has $1,000 in Treasury bonds.

    Of course, the real world is a lot more complex than this example, but the fundamentals are the same. I think the reason this concept is hard for people is because Treasuries are priced in dollars. If they used bushels of corn instead of Treasuries, it might be less confusing.
14. Ricky on May 19, 2009
    
     

    Pelon,

    I think the reason why people are confused is because of the use of the word “print.”

    There are three ways in which the Fed creates a higher money supply, none of which are physical “printing.”

    From my understanding, the three ways that the Fed ups the money supply are buying government bonds from the public, lowering the reserve requirements, and lowering the discount rate.

    I am always confused when people say the governement or the Fed needs to print more money when I believe that it is technically incorrect.
15. fafura on August 15, 2009
    
     

    Isn’t it this way?: Government issues $1000 in bonds, Fed buys them injecting $1000 of money into economy,which can be expanded to about $10 000 by fractional reserve system. So money in circulation gets raised (printed) by $1000-$10 000 and government owes $1000 plus interest.
    Wouldn’t be better for the government to just print $1000, raising money in circulation by the same amount, and not to owe a penny vs $1000+interest?
16. lauermar on August 6, 2010
    
     

    The bottom line is that the Fed has pumped $2 trillion into the financial system via its purchases of government debt and mortgage bonds, while lowering interest rates to the floor.

    To make those purchases, the Fed essentially printed money (the $1 trillion in reserves). If—and it’s a big if—those reserves were lent out quickly, the money supply would increase rapidly and generate inflation. But as we’ve noted incessantly, bank lending has continued to contract and the velocity of money (or the money multiplier) remains extremely low.

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