Is This the End of the “Money Printing” Era?

About a month ago I wrote a piece titled “Please Stop with the ‘Money Printing’ Madness”.  The post describes how wrong it is to describe the various operations in previous years as “money printing” (whether it be QE or deficit spending).   Yet this has been one of the dominant themes over the years.

Of course, the idea of “money printing” implies that inflation is likely to result at some point in the future.  More money will chase more goods, etc.  And this concept has been used repeatedly in recent years to justify specific portfolio positioning by investment managers.  In brief, you short the USD relative to other currencies, you short US government bonds and you buy hard assets.  In particular, these “money printing” proponents have been huge advocates of buying gold and silver.

So, it’s interesting to ask, as gold and silver prices crumble, are we finally seeing more people come around to the idea that the “money printing” myths have been based on a false understanding?  Will people finally stop referring to QE as “money printing”?

gold

 

(Gold chart via Mark Dow)

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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • GLG34

    I’m not convinced that anyone understands exactly what QE is or how it works. So no, you’re way too hopeful. I think people are just confused why there’s no inflation, but not really exploring the reason why.

  • Detroit Dan

    Deficit spending really is money printing, in the sense that bonds are equivalent to money as representing purchasing power.

    QE, as is so often said here, is just an asset swap…

  • Geoff

    Will people stop referring to QE as money printing? Good question. Here is another one. If QE is not money printing, what can central bankers really do to stop a truly deflationary situation? Not much, it seems.

    Scary thought.

  • http://orcamgroup.com Cullen Roche

    Bonds have a lower moneyness than deposits so I wouldn’t agree entirely. Besides, if we start calling bonds money then all financial assets are basically a form of money. That’s obviously not true. The reason bonds are issued in the first place is because the issuer wants the means of final payment, not the bonds. The US govt issues bonds because the monetary system is designed around inside money which the govt obtains so it can redistribute it.

    I know you’re MMT, but you really need to get the details on this right, otherwise, you’ll go implying that the system is designed around outside money, which is a mistake that only neoclassicals should make and not post-keynesians.

  • Jason

    While I do grasp the notion that growth in bank reserve balances does not necessarily entail growth in the money supply, as growth in reserves does not necessarily entail loan origination. What happens when loan origination does start to rise? I figure that loan origination has been constrained due to a lack of credit-worthy ventures at the prevailing interest rates; however, as interest rates rise and the return on lending rises, won’t banks have greater incentives to loan, leading to a glut of lending from pent up supply? Would this glut of lending lead to rapid expansion of the money supply, push up interest rates further, and lead to a situation where there is rapid acceleration in interest rates in a short time? Basically, could the tapering of QE be the event that sparks the conversion of reserves into new money?

    Perhaps this is a very simplistic view; I am hardly an expert.

  • http://orcamgroup.com Cullen Roche

    That’s one of the main points you learn from MR. The real “money printers” are banks when they issue new loans. So yes, you’re right.

  • Johnny Evers

    Can’t you look at QE as a type of loan?
    The Fed ‘borrows’ money from itself to buy bonds.
    Is the Fed going to sell the bonds back and pay itself back? Would that create deflation? Not if buying the bonds didn’t creat inflation.
    What if the Fed just buries the bonds? Does the Fed have to pay itself back?
    The mind reels.

    I wonder if people realize the Fed can buy assets without inflation if it shouldn’t buy other assets instead that might be more helpful to the general economy.

  • JGF

    He’s right, of course, that the money supply increases when banks issue new loans.

    But he is also saying that the increase in lending will be triggered by the *rise* in rates. While banks may have greater incentive to loan as interest rates rise, it is countered by the reality that consumers and businesses will have a lesser incentive to borrow.

  • Don Levit

    The Fed does not borrow money from itself.
    The Fed buys Treasuries, jusy like China buys Treasuries.
    The asset on the Fed’s balance sheet,as the asset on China’s balance sheet, is backed by a liability of the federal government, adding to debt held by the public.
    The Fed buys Treasuries just like any oitside investor does, raising the debt held by he public.
    Don Levit

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Well if we suppose the Fed’s authority is expanded to allow them to buy assets other than Tsy debt and MBSs, then they could directly purchase items that make up the CPI, for example. Probably not an attractive option for all kinds of reasons, but it is a conceivable strategy. Or they could act in concert with fiscal policy (i.e. keeping money “easy”) while Tsy deficit spends (either by increasing spending or decreasing revenue) to try and raise inflation. Between the Fed & Tsy, it seems plausible to me that there are still ways to try to stop or prevent deflation.

  • http://orcamgroup.com Cullen Roche

    I see. Banks lend to creditworthy customers and do so based on maximizing the spread between their assets and liabilities. I don’t think higher interest rates will necessarily make banks lend more. In fact, higher rates could make for fewer creditworthy customers and a tighter spread. Hard to say for sure though. I think demand is the key component of lending though banks obviously have lending standards which create the appearance of a “supply constraint”.

  • http://joefacer.com Joe

    Ya got two issues, one is the real issues of economics and moneyness. The other is language.

    One is driven by intellect, the other by laziness.

    Ya don’t have a chance. Money printing it is and will always be.

    But for what it’s worth, you have educated me. See ya at Stocktoberfest.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    I mostly agree, but rather than write “adding to debt held by the public” I’d say “adding to the liabilities of the Fed.” The idea being that the Fed is a separate entity from the rest of the government and is truly a hybrid public/private institution with a large degree of independence.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Just yesterday I heard (in a youtube interview w/ a prominent scientist) that a full 50% of Americans got the following question wrong when asked:

    “The Earth orbits the sun and it takes a year to complete one cycle around it. True or false?”

    Given the frightening prospect that this poll is an accurate reflection of the average American’s “knowledge” and interest about the world and factual information in general, it wouldn’t surprise me one bit if a significant percentage of people think that QE is some form of Satanic worship. Could it be that we’re entering a new bronze age in terms of the population knowing factual information about how the world works? (I’m pretty sure your average bronze-ager had no idea that the Earth revolved about the sun either).

  • http://brown-blog-5.blogspot.com/ Tom Brown

    This doesn’t match up exactly with what the scientist being interviewed said (he commented that he didn’t believe the result, and thinking it must have been a trick question read the question exactly as presented on the poll/quiz… and he found to his astonishment that it was as straight forward as what I’ve written above!):

    http://www.science20.com/news_releases/science_literacy_american_adults_flunk_basic_science_says_survey

    But it’s pretty close and the results are almost as dismal. So the question was actually in two parts. A little googling indicates that somewhere between 20% and 33% of the American public thinks the sun revolves around the Earth…. [sigh]… I guess that’s a bit better than I thought, but not much!

  • midas2

    Remember in the 80’s with Reagan as Pres. and Volcker at the FED, they were confounded to see consumer debt going way up while interest was in double digits.

  • John P.

    While we may argue on semantics, the question really is, “Can the actions of the Federal Reserve lead to run away inflation?” If the answer is ‘yes’, then it is printing money in the eyes of the public who will be the victims of Bernanke.

  • Geoff

    Right, Tom. Fiscal policy could certainly help combat deflation but I was talking about central banks. If the Fed were to extend its purchases into real goods and services (or did a helicopter drop), I believe that would be considered fiscal policy.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    Monetizing debt is where the central bank makes new money and buys government bonds. How is QE not monetizing debt?

    http://en.wikipedia.org/wiki/Monetization#Monetizing_debt

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Plus when the Fed spends it doesn’t really get in debt, since it gets those matching assets: i.e. it doesn’t normally get itself into a negative equity situation whereas the Tsy normally has negative equity.

  • http://orcamgroup.com Cullen Roche

    The idea that QE is monetization is based on the assumption that an increase in the money supply shifts the aggregate demand curve to the right because the supply of money increases. What this fails to note, however, is that the pvt sector also loses a financial asset so it actually doesn’t shift the aggregate demand curve at all. People make the false argument that QE is inflationary using the above argument. If you want to call QE monetization then fine. It technically takes a bond and turns it into something with higher moneyness. But you better also point out that the govt is unprinting a t-bond from the private sector. The inflationary impact of these transactions should be relatively minor, if anything….

    Make sense?

  • http://howfiatdies.blogspot.com/ Vincent Cate

    If at the same time the central bank is monetizing debt the government is selling enough bonds that it can spend twice what it gets in taxes, then the inflationary impact could be large.

    In a previous thread you did not really give some criteria to objectively say if a central bank was enabling deficit spending. Clearly in Weimar Germany and Zimbabwe the central bank was enabling deficit spending. You say it is not in the USA or Japan. But what is the line where it crosses from one to the other?

  • http://howfiatdies.blogspot.com/ Vincent Cate

    When I read Wikipedia again about Monetizing Debt again I don’t see anything about assumptions of shifting aggregate demand curves. It just says central bank buying government bonds with newly made money.

  • http://letterstocreationists.wordpress.com/monetary_system/ ScottB

    Cullen, another good post here.
    FYI, I have taken a lot of your MR, and stirred in some additional examples in a longish essay on the monetary system, here: http://letterstocreationists.wordpress.com/monetary_system/

    I give explicit credit to MR and to you, even (out of appreciation for all the good info and good attitude you bring to the world) giving a little free publicity to Orcam :-). If any material there seems helpful, feel free to make use it. I threw in some stuff on Chinese currency manipulation and on some juicy disagreements among academic economists.

    I went into some detail on how net savings arise, since it is quite counter-intuitive and is not always treated clearly in MR that I could see. “S” in sectoral balances is in general unaffected by individuals trying to save or pay down debt; rather, it is strictly a residual of decisions (mainly by businesses) to invest, and of government and foreign surplus or deficit.

    Thanks also to the commenters here at Prag Cap, especially Tom Brown, who have answered questions from me and other seekers after truth.
    -Scott Buchanan

  • http://howfiatdies.blogspot.com/ Vincent Cate

    Would you agree that the equation of exchange can be used for different definitions of the money supply? So we could work with just base money and some velocity, or M2 and some other velocity, or everything up to government bonds, and some 3rd velocity. Right?

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

  • Hello world

    Open market operations (reverse repos) on the part of central banks maybe are not “money printing” and are an asset swap… but they are inflationary. For they change the holdings of banks: govt. bonds to central banks in return for cash. With greater holdings of cash vs. bonds, banks can lend more (put more credit into the economy), which is inflationary. This is the reason the PBOC is trying to fight China’s banks by declining to perform open market operations and allowing them to exchange their bond holdings for cash so they can continually meet their cash reserve requirements and continually make loans (many of which are non-performing). So, QE is maybe not “money printing”, but is inflationary. We’ve not seen the inflation–not b/c it wasn’t inflationary–because it’s been in the face of deflation; i.e., deflation would have been worse without QE.

  • http://orcamgroup.com Cullen Roche

    “When government deficits are financed through debt monetization the outcome is an increase in the monetary base, shifting the aggregate-demand curve to the right leading to a rise in the price level ”

    From your Wikipedia source. That’s wrong.

  • http://orcamgroup.com Cullen Roche

    Hi Scott,

    Great stuff! Glad you’ve found my work helpful. Hope to be of more help in the future.

    BEst,

    Cullen

  • http://orcamgroup.com Cullen Roche

    That’s not quite right. You’re using a money multiplier model. The multiplier is false. Banks don’t lend reserves. The constraint on bank lending is not reserves, but capital. When QE occurs the bank’s capital levels are actually unchanged so a bank’s ability to lend is unchanged (with the exception of QE1 which actually raised the value of MBS held by banks and therefore improved the health of the banking system substantially).

    I would recommend this paper if you want more detail.

    http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf

  • greg

    what about the fact that shadow banks turn treasury collateral into money? So QE, on the one hand alters the liquidity structure of the market (rather than prints money) but on the other hand it removes collateral, whihc is a form of liquidity drain.

    doesnt the shadow banking sector just turn long term illiquid assets into ‘money’ through collateralisation and/or securitisation?

  • http://orcamgroup.com Cullen Roche

    Wasn’t part of the problem in the last boom that we had shadow banks leveraging their balance sheets too much? I know lots of people have read this from Zero Hedge, but which is it? Is it bad that shadow banks can leverage various forms of collateral? Or is it a good thing? From a traditional banking perspective, it doesn’t much matter because real banks can leverage reserves or t-bonds.

    Also, there’s another contradiction in the ZH story. If you really want more safe collateral via t-bonds then you’re implicitly supporting more govt spending (ie, deficit spending since deficit spending is how more risk-free t-bonds are introduced into the economy) which ZH definitely doesn’t.

    Lastly, the amount of t-bond buying that the Fed has done has roughly offset the amount of new issuance so if you’re going to argue that the debt is being “monetized” then you have to consider all the accounting flows there. A t-bond is lost, but a t-bond is also gained via the deficit spending process. It’s a t-bond neutral program. The aggregate system isn’t losing t-bonds here. It just isn’t gaining them….

    Bottom line, there are many contradictions in that whole story.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Wow, Scott! That’s quite a nice article, … from what I’ve made it through so far. You’ve really covered a lot!

  • http://None Pete

    When bank makes any loan, it requires a collateral, either a house, a car, a business with potential cash flow. The bank needs something valuable for the loan (you may call it asset swap too). It’s not purely from thin air. Yes, the loan is printing money. The same is true for central bank. They “buy” bond or MBS in order to inject cash to the banks. They don’t “give” cash to anyone. The cash from central bank, the bank reserves, is printing money. It’s the “price” of your assets (your moneyness thing) that matters the most and the price fluctuates.

    In the past crisis, a lot debt is written off. In this one, central bank bought a lot “assets ” at face value. Whatever created is still there. So the world is saved.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    That is in the next section on inflation. It is not part of the definition of monetizing debt.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    If you define the money supply to include bonds then monetizing bonds does not increase the money supply. But the monetary base does not include bonds. So the monetary base does go up when they monetize bonds.

    If you define the money supply to include bonds then as the government sells bonds so they can spend $1 trillion more than they have in taxes the money supply goes up by $1 trillion. That is inflationary. Right?

  • Adam P.

    There is an even more frigthening video. More than 60% of Americans got the following question wrong when asked: “Who was Adold Hitler ?”

  • Adam P.

    QE1 was real money printing. So it seems that gold is unwinding to the value at the end of QE1, that is at about 1050, may be more to keep up with real inflation, so 1050-1150 is probably the bottom for gold where it will stay sleeping until there is real inflation. It’s also 200 to 300 $ less than the marginal cost of many junior mines, that will go burst; and this is also good, malinvestments must go burst. Hopefully we will see healty bankruptcies again in the financial sector. Bankruptcies are necessary to heal a capitalist system.

  • InvestorX

    I am sure there are many misguided interpreatitons of QE and what drives gold prices or stocks etc. One needs just to see that after the recent rout gold is dropping because of the taper and stocks are rising because the taper will come later or will come not at all or QE will be even increased because the economy is weakening again.

    Truth is that gold is most affected by the level and change of real interest rates. And the latter have skyrocketted IN SPITE of the Fed’s action, expected Fed action and dovish talk. The only explanation I see is an unwind of a negative liquidity premium priced in bonds and across all assets. Nothing to do with a change of view by the market participants on how QE works etc.

  • InvestorX

    Besides when the Fed prints $2tr+ of reserves and they land as $2tr of deposits in the banking system – this is money printing and it is happening right now and directly, not later and not dependent on what banks might do.

    QE1 on top of that had an element of fiscal gift to banks, which is a clear breach of the Fed’s charter.

  • http://orcamgroup.com Cullen Roche

    It’s in the inflation section, which is the part that everyone (including you) has been misinterpreting for years and as a result making bad hyperinflation predictions….

  • Johnny Evers

    The Fed ‘buys’ bonds with an electronically created deposit.
    In my view, QE completes the deficit spending ‘printing’ cycle by retiring the bond with printed money. You can say that money is printed when the bond is issued (if you beleive like me that a T-bond is the same as a dollar OR when the Fed redeems the bond in QE.
    I think we keep trying to fit the Fed into some kind of box, like it’s a real bank with real liabilities and assets and a real balance sheet.

  • http://orcamgroup.com Cullen Roche

    The Fed is a real entity that enacts real policy that really influences pvt balance sheets in very specific and precise ways. Your oversimplification is a lazy consolidation of the Fed into the US Tsy that distorts monetary policy and fiscal policy. I’m tired of correcting you about this. If you want to oversimplify things and dumb them down then go start your own website where you do that. But you need to stop doing it here. I am a stickler for the details because these oversimplifications confuse people about what’s going on.

  • Johnny Evers

    I would think we are all free to discuss what the Fed might or might not do, and what it can and can’t do.
    Recent history shows that central banks can do all sorts of things that would have been considered unbelievable a decade ago.
    Just in this thread, Tom and Geoff (who are certainly on point with MR) are speculating that the Fed might buy other assets than Tsy and MBS or even do fiscal policy. Tom does qualify that by saying the Fed’s authority might need be expanded. I guess my view is that the Fed can expand its authority on its own.

  • http://orcamgroup.com Cullen Roche

    See, this is the problem. You’re 100% wrong about that. The Fed is only authorized to purchase govt guaranteed securities. If it wants to be able to buy other assets it needs Congressional approval. This is why your comments are dangerous. They are often counterproductive to what I am trying to achieve here, which is to better inform people about the specifics of how these things work. You’re smart enough to know more than most, but not well versed in this stuff to realize that you don’t know it as well as you think. Yet you continually come here saying the same exact thing every single day as though they’re facts.

    I don’t intend to sound rude, but you need to spend more time asking questions and exploring for answers as opposed to just assuming you have everything figured out and then repeating misleading comments day in and day out which forces me to correct all the errors so others don’t make the same mistakes….Thanks.

  • Yancey Ward

    The inflation is there right in front of everyone, it just hasn’t been transferred into consumption goods yet, and maybe deflation in asset prices in the future means it never will be, but it is still an open possibility.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Adold?… uh, I might get that one wrong too. Adolf’s special needs step brother? … ;)

    Sorry, couldn’t resist. That is scary!

  • Geoff

    InvestorX, from the perspective of the banking system, the reserves are assets and the deposits are liabilities. They are two sides of the same coin. The capital position of the banking system (i.e. their money creating ability) remains unchanged.

  • Johnny Evers

    I ask lots of questions. I express opinions, I throw out hypotheticals, I present scenarios.
    That’s how the discussion evolves, imo.
    You think the Fed is restricted to a certain set of operations, but I read Ben Bernanke and he has a much broader set of potential options in mind.
    So maybe you’re saying what he can do now, but I am thinking about what he can do if he really wanted to.
    By the way, this little exchange started with Don saying that the Fed buys bonds the same way that China buys bonds — when actually China buys a bond with an existing deposit, whearas I see the Fed electronically creates a deposit out of thin air. Do you think he’s right?

  • http://howfiatdies.blogspot.com/ Vincent Cate

    I say that the Fed can print $2 trillion and then pay the banks to leave $2 trillion at the Fed as excess reserves and so it is like the $2 trillion has yet to leave the Fed. This is why it is not inflationary.

    So if it causes inflation can depend on what else is done. But the definition of monetizing debt is “central bank buying government bonds with new money”. Do you have any other definition of “monetizing debt”? How is QE not “monetizing debt”?

    Hyperinflation is not just from printing money. It is from out of control money printing when the public decides they don’t want to hold government bonds any more and the only way the government can keep in operation is by getting the central bank to monetize as others get out of the bonds. We have not seen the panic out of bonds yet, so we are not seeing hyperinflation yet.

  • fresno dan

    Where does the FED get the money to buy treasuries or MBS’s? It creates it (so it does not print it for the semantically obsessed, but money is created to buy these “assets”). This works fine when the loans are true loans with normal rates of default – basically, normal banking.
    But what happens when these “assets” are worth far, far less when they start defaulting?
    Now the interesting question is: what is the “true” price of those “assets”? But were they bubble prices or not??? Were these “loans” and “bonds” fraudulently orignated, and a good deal of the resulting GDP a farce based on fraud and self dealing?
    Is it a good idea to maintain NINJA loans?

    But the FED is raising the price of bonds (i.e., lowering the price of interest) and raising the price of the “assets” in the QE program. It is a straight out subsidy to banksters and a cover up of the FED’s own lack of will to regulate the banks.

    Would anyone else buy these MBSs – at the price the FED pays? Elsewise, why even have the program (hmmmm, well it seems to help the stock market, the banks, but doesn’t help the employment participation rate, or the returns to captical versus labor….qui bono)

  • InvestorX

    I am talking about M2 rising by $2tr – the amount by which QE was with non-Banks. QE (with the exception of QE1) has no imapct on the capital Position that is clear. But it is Money printing – it increases the amount of Money Held by non-Banks by the amount QE is with non-Banks.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    “I say that the Fed can print $2 trillion and then pay the banks to leave $2 trillion at the Fed as excess reserves and so it is like the $2 trillion has yet to leave the Fed. This is why it is not inflationary.”

    When you write “print” here and “leave $2 trillion at the Fed” … it makes me think you’re talking about physical paper notes. Is that what you’re talking about? This $2T is not in the form of paper notes warehoused at the Fed. These are electronic reserves and thus they can NEVER leave the Fed… they’re always in someone’s Fed deposit, and all Fed deposits are always at the Fed! Also, paper notes that are warehoused at the Fed have no value (other than the paper they’re written on): they don’t appear on the Fed’s balance sheet. Electronic Fed deposits can be debited by the Fed for various reasons including in exchange for a cash distribution to a bank. Which brings me to my next point:

    Fed deposits can only “go” three places:

    1. They can be moved from one Fed deposit to another at the Fed (i.e. one Fed deposit is debited and another credited in the same amount). You and I will never have a Fed deposit, since we are not allowed to have Fed deposits… nor are most businesses, private organizations or individuals.

    2. Withdrawn as cash: as I’ve already mentioned, this happens when a bank “buys” cash from the Fed to meet its customers’ demands for this form of convenience. The Fed debits the bank’s Fed deposit and sends the bank paper notes (which now have the face value printed on them… and which now take the place of the debited Fed deposit as a liability on the Fed’s balance sheet).

    3. Erased permanently by the Fed: either when Fed deposit holders pay back principal (e.g. when Tsy pays pack t-bond principal on Fed held T-bonds or when banks pay back overnight loans from the Fed), or when the Fed sells assets.

    You make it sound like Fed deposits can somehow leak out of the Fed into the real economy. There is a special case sense which approaches this scenario: when a Fed deposit holder purchases something (e.g. office supplies) from an entity in the non-Fed deposit holder marketplace (i.e. the real economy): if the seller’s bank is NOT the purchasing Fed deposit holder, then reserves are moved from the buyer’s Fed deposit to the seller’s bank’s Fed deposit, and the seller’s bank credits the seller’s bank deposit in return. However, even in this case, no Fed deposits ever leave the Fed: they are simply moved from one Fed deposit to another: however in this special case a bank deposit (real-economy money) is created in the process.

    What I call the “real economy” above runs almost entirely off of bank deposits, not Fed deposits. Much of the movement of Fed deposits from one Fed deposit holder to the next is simply a consequence of there being a multitude of commercial banks: if there were only a single commercial bank most every private transaction would take place in the real economy with no movement or change in Fed deposits whatsoever: only bank deposits would change.

    If you think that if the Fed stops paying banks IOR, that those deposits will somehow spill out into the real economy you are mistaken. Again, they can only go one of the three places I’ve listed. So it’s really only number 2 on my list which represents a mechanism for this to happen, but the amount of cash the real economy holds depends on its demand for this form of convenience. It has nothing to do with the IOR the Fed pays to banks. I suppose if the Fed instituted a significant NEGATIVE IOR, banks would pass along the costs to deposit holders who would in turn withdraw LARGE amounts of cash (above the convenience level)… and then perhaps a new business would be born: Non-bank private storehouses for physical cash… again to maximize people’s convenience. But this would never happen because it would damage the commercial banking system… and I doubt negative IOR would have much impact on the economy other than that. Banks don’t “loan out” reserves, except to other banks.

  • Geoff

    Yes, the amount of money held by non-banks has risen by $2tr, but their bonds have declined by the same amount. If you call the first part “money printing” then you should call the second part “bond unprinting”.

    The net effect is dick.

  • http://www.nowandfutures.com bart

    “Will people finally stop referring to QE as “money printing”?”

    Never, because it’s incorrect not to.

    Growth in reserves doesn’t even vaguely come close to total QE money creation, and rehypothecation of those reserves exists and in volume, etc.

  • CharlesD

    As Cullen as explained, QE adds no net financial assets to the system.
    Yes, bank reserves have increased. However, my understanding is that loan demand (which impacts money supply growth) is a function of the demand for loans, credit standards and the resulting number of credit-worthy borrowers. This demand has no relationship to bank reserves.
    Hence, there is no direct transmission mechanism from QE to monetary growth and higher inflation.

  • CharlesD

    I meant, of course, loan volume (not loan demand) is a function of the demand for loans, credit standards and the resulting number of credit-worthy borrowers. This volume has no relationship to bank reserves. Sorry for the error.

  • CharlesD

    Regarding the issue of deficit spending being “money printing” I think
    (but I don’t want to put words in anyone’s mouth, I could be wrong)
    Cullen might agree to the statement that “deficit spending creates a new private sector financial asset in the form of a Treasury bond”.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    From your #2 you clearly understand that excess reserves can be withdrawn as cash. Yet you seem to think it matters that at the moment these are electronic dollars and not physical dollars. If the Fed needs to get more physical dollars made they will. If a bank can earn more loaning out their money safely someplace else, they will take out their excess reserves and do so. Nothing stops them.

  • rpurdy

    I would say the new private sector financial asset is the money spent by the gov’t into the private sector thru the deficit spending. A bond issued by the gov’t to balance the accounting is purchased by the private banking system with dollars, withdrawing dollars from the system and replacing them with the bond, netting to zero. QE reverses this process as he Fed repo’s the bond and gives the bank dollars, once again doing an asset swap netting to zero, but changing the term structure.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    I don’t know about you but the amount of cash I hold is purely a matter of convenience. It makes no difference what the IOR rate is. Bank deposits are MORE convenient in almost all circumstances.

    Small businesses take out cash to support their cash registers… but they receive a good bit of cash from their customers too… more than they supply in change.

    Banks want to hold the minimum amount of vault cash as is possible because it’s both inconvenient and dangerous to store large amounts of vault cash. Plus they don’t get IOR on it.

    Most loans are not immediately taken out in cash. The bank creates a deposit out of thin air, and then a fraction of that deposit may be withdrawn by the borrower depending on his needs.

    Probably credit card purchases represent the most common form of lending. Cash never comes into play: the deposit is created and immediately transferred to the vendor electronically.

    I agree that the Fed will get more physical dollars made if that need arises… up to a point! The system cannot function if ALL bank deposits are withdrawn as cash. And with FDIC there’s no need for people to run to the bank and withdraw their entire deposit in cash any longer, even during a sever financial crisis.

    Banks can “loan out their money” (by which I guess you mean reserves) only to other banks, for which they get a whopping 0.25%: The same as IOR.

    Otherwise banks create banks deposits out of thin air and credit borrowers with it for higher rates (think credit card or mortgages, etc.). The bank makes money by lending through these deposits it creates! It gets a much better spread on that than for lending out its reserves to other banks. After a loan is made, a customer may choose to withdraw part of the resulting deposit as cash, but that’s entirely up to the customer.

    So in summary, my two main points are these:

    1. Cash is a function of customer convenience only. It has nothing to do with what the bank wants to lend out or with IOR. It’s not a bank’s decision to lend out more cash if it thinks that somehow it can get a better spread on “cash” loans: the cash withdrawn is determined entirely by what its deposit holders want to do. In fact it’s not EVER in a bank’s interest to have customers withdraw their deposits as cash. It is purely a service they provide for their customer’s convenience. If the banks could have their way we’d go paperless tomorrow and get rid of ALL cash… thus forcing private non-banks to hold their money as electronic bank deposits (inside money) 100% of the time.

    2. Banks make their real money through lending out inside money (the electronic bank deposits they create out of thin air). These deposits are legally equivalent to paper dollars, have nothing to do with the reserves they own as assets, and only banks are chartered by the government to create them. This is much better than lending out reserves (to one another) since they can get a higher rate (instead of the low FFR) and they don’t need to “have” the money on hand to start out with. They create it out of thin air as a liability on their balance sheets, just like the Fed creates Fed deposits as liabilities on their balance sheet out of thin air!

  • http://brown-blog-5.blogspot.com/ Tom Brown

    I’ve illustrated Cullen’s Peter/Paul deficit spending scenario here in balance sheets. The core part of the process is the transition from balance sheet sets 2 to 3 (deficit) and from 3 to 4 (spending):

    http://brown-blog-5.blogspot.com/2013/05/banking-example-8-treasury-deficit.html

    The other sets of balance sheets I illustrate (1, 5, and 6) are somewhat superfluous.

    As rpurdy mentions, another possibility is that the private banking system buys (for the purpose of holding long term) the Tsy debt instead of a private non-bank sector (as in the case I’ve illustrated). However, this is not the usual case (if we’re dividing the Tsy debt purchasing world up into only private non-banks and commercial banks).

    In reality a LARGE chunk of Tsy debt is purchased/held by parts of the US government itself (Social Security Admin, Medicare, etc.) but this does not really change the Peter/Paul scenario and is more an accident of the laws which ear-mark certain tax revenue streams to these parts of the government. If you include these tax revenues under the general heading “government” then these intra-governmental debt purchases just amount to moving money around w/in the government and do not represent some form of governmental self-funding.

  • Pliu412

    From TBAC (Treasury Borrowing Advisory Committee),
    QE is defined as transformation of non-cash HQC(High Quality Collateral) into cash HQC.

    Somehow, these cash HQC are “leveraged” to create pvt bank deposits in the bank balance sheet. The excess bank deposits (created not by bank loans, but QE excess reserves) used to buy securities as assets in the bank balance sheet. This is how I viewed the flavor of “printing money” – by FED unintentionally together with pvt banks intentionally.

  • http://orcamgroup.com Cullen Roche

    Well, that’s what banks do. They leverage their capital to create loans. I don’t like the term leverage there because it implies a money multiplier model, but banks within capital requirements are essentially expanding their balance sheets by issuing loans. And the core of that balance sheet involves having high quality assets that will ultimately make the risk of making loans profitable.

    Shadow banks, of course, can’t use reserves as collateral so that’s the argument being made about how QE removes liquidity. I think the position is being overstated and is largely misleading.

  • http://orcamgroup.com Cullen Roche

    The Fed is buying govt guaranteed securities. They’re worth 100 cents on the dollar so long as the US govt has the ability to tax us all. So the Fed might be mispricing these assets on the upside, but the assets are definitely not worth less than par unless you think the US govt is going bankrupt, which it’s not so long as it can tax us all.

  • InvestorX

    The net effect is that there is $2tr more purchasing power in the hands of spenders on aggregate and $2tr less of assets. The effect is that the marginal utility of cash decreases and the marginal utility of assets (and potentially goods and services) increases. At the end it is inflationary, but most likely will be shown in asset prices and not goods and services.

  • Rick Face

    The money printing will never end. We are going to have global QE on steroids in the coming years.

  • matt mcosker

    And how many policy makers would get this wrong, probably lots.