Topic: How does new "Base Money" enter the economy? (Read 3411 times)

i wish i was the bank selling the to the fed.

Sorry for the long answer in my last post. Short answer: Fed purchases an asset then sits on it. It doesn't have to sell. It can be a big looser but it doesn't care.

You're right. The Fed will buy assets and pay with money that they just make up to raise the monetary base. Not much of this newly made up money has to be newly minted cash. It's just numbers in a computer and, as new money, it goes through the multiplier effect due to the fractional reserve system.

The most common asset the Fed buys is US government debt. The Fed is supposed to only raise the base money supply as the economy needs it to grow. So it only buys what it needs in US gov debt.

If the US government issues more debt than the Fed wants to buy (which happens most of the time) then they have to find private buyers for the federal debt. This route does not increase the base and makes it harder for other borrowers in the economy since this drives up interest rates.

If the Fed decides it must increase the monetary base by more than can be accommodated by buying government debt, they'll buy other assets. This can include business bonds or even assets banks want to get rid of like questionable mortgages.

To reduce the monetary base the Fed sells assets. This can happen if inflation ticks up and the Fed decides to slow things down. They accumulate numbers in accounts they own as a result and just drop zeros as needed. Money disappears.

As the government pays off its debt (to the Fed among others) the monetary base does want to shrink. The Fed just makes sure it continues buying enough debt (government or other) to not let that happen and in fact to force the monetary base to grow at some rate they choose.

The Fed may or may not loose as a result of this but they don't care since it's made up money.

Er, wait.  Are you just asking about the discount window?  The FED is technically a loser when they loan money at less than the market rate (the FED funds rate).

Feel free to ignore me but I think the answer you're looking for is that, normally, bankruptcy destroys debt.  And when bankruptcy doesn't destroy debt (like when banks aren't allowed to go bankrupt) then open market operations allow the FED to buy government bonds from the banks, creating a feedback loop known as quantitative easing.

sorry ffe,

I have renamed the thread after mis-using terms. I am specifically talking about the monetary base and in what way open market operations via repos / reverse repos are used to create money. The only way I can see new currency entering the system is if the central bank purchases an asset then sells it back at a loss.

For money to enter the economy, the reserve bank must be a net loser in a transaction.

You asked how freshly minted money enters the economy. You've gotten your answer. It's printed by the Treasury, delivered to the Fed, Handed over to banks in exchange for reserves expressed as numbers in computers, then handed over to people at the bank windows.

A different question is how do bank reserves grow or contract. Loans certainly do increase bank reserves.

Loaning money doesn't create an increase in the total money supply. It will affect liquidity, but the amount of currency(digital also) ever created will be the same.

Fixed Fractional Reserve just means the every dollar can potentially be loaned 10 times, increasing liquidity, otherwise if this were the sole means of creating more currency FFR would need to continue up, ( which we know it can't) otherwise if you lower the FFR ratio then you would need to "invent" new liquidity to replace it, to avoid deflation.

Yes money is loaned into existence.  It basically goes to idiots who get second mortgages on their houses they can't afford.

In the USA the Federal Reserve supplies cash as needed to banks that want it in exchange for their reserve balance with the Fed. The Federal Reserve just asks the Treasury to print more of the stuff and deliver it as needed.

Regular banks maintain reserves from money that is deposited with them. Most of those deposits are not cash but checks drawn from accounts at other banks that created the money as part of the fractional reserve system. Someone deposited money with them. They loaned most of it out but credit the original depositor with the full amount. The guy getting the loan writes a check to our bank and behold; our bank has more reserves and can loan it out in turn, deposit it with the Federal Reserve, or exchange it for paper cash at the Federal Reserve window.

In short new money is created when a bank makes you a loan and this new money can be exchanged for cash at the Fed. They just print it.

sorry, i meant a total increase in monetary supply.


lol.....



teach me? are these private or public institutions?

Huh, are you just talking about worn out bills or what?

The Federal Reserve Bank also "prints money" aka counterfeiting but that doesn't really result in any extra currency in circulation they just add some digits to reserve accounts which banks keep. The amount of currency in circulation rises pretty steadily no matter how much the Fed is stealing from us.

... then how can we have economic growth and inflation?

Banks exchange old currency for new currency and the old currency gets shredded or recycled.

[Edited after the 9th post]: The title of the topic has been changed from

How does freshly minted money enter the economy to its current title.

Sorry for the inconvience.



Fairly basic question I know, can't find a definitive answer. And I'm not talking about liquidity, M0 capital requirements, etc, and I'm not talking about currency entering via government spending.