Money Printing: A Simple Guide to a Complex Topic
Money printing seems straightforward but can be quite confusing. Why does the government sell bonds to the public when the Federal Reserve (Fed) can simply print more dollars to cover expenses? The answer is simple but requires some critical thinking. — Let’s break it down.
Understanding Money Supply
To grasp the concept of “money printing,” we first need to understand the basics of the money supply.
Narrow Money (M0): At its most restrictive, we have narrow money, or M0. This includes only the currency in circulation and the cash reserves held by banks. M0 is often referred to as the monetary base.
M1: M1 includes everything in M0 plus demand deposits and any outstanding traveler’s checks. Demand deposits are liquid bank accounts like checking and savings accounts. Banks don’t keep all this cash in their vaults; they estimate how much needs to be available based on risk analysis. The rest is just digital entries on a ledger.
In 2020, the M1 money supply skyrocketed due to what is commonly referred to as “money printing.” We’ll explore this in more detail later.
Broad Money (M2): Moving a step further, we have M2, which includes M1 plus money market savings deposits and time-restricted deposits under $100,000 (like CDs). M2 represents more liquid and semi-liquid assets.
Post-2020, M2 expanded more gradually due to the Cantillon Effect, which explains how those who receive new money first (banks, government, or financial institutions) benefit the most.
Treasury Bonds Explained
A US Treasury Bond is a bond issued by the government, similar to a bond from a company like Apple or Microsoft. When the government borrows money, it pays interest to the lenders, just like a mortgage. The US government borrows heavily because it spends more than it receives in taxes, leading to a growing public debt, which now stands at $34.6 trillion.
Who Buys These Bonds?
The buyers include individuals, US banks, foreign central banks (like those in Japan and China), and the US Federal Reserve itself.
How Money is ‘Printed’
The Fed uses tools like Quantitative Easing (QE) and Quantitative Tightening (QT) to manage the economy. During financial crises, such as the Great Financial Crisis (GFC) or the 2020 lockdowns, the Fed buys US Treasuries and Mortgage-Backed Securities (MBS). This process injects liquidity into the banking system by creating bank reserves out of thin air — a digital process of money creation.
Here’s How It Works:
- Announcement: The Fed announces its intention to purchase securities and the amount it plans to buy.
- Market Purchase: Primary dealers (major banks) buy these securities in the open market on behalf of the Fed.
- Crediting Reserves: The Fed credits the reserve accounts of these banks with newly created money and puts the Treasuries on its balance sheet. This increases the total reserves of the banks, injecting liquidity directly into the banking system.
Understanding money printing and the broader money supply helps us understand why the government sells bonds and how the Fed manages the economy.
Blockchain technology offers a decentralized alternative to this traditional monetary system, enabling transparent, immutable transactions that can potentially reduce the influence of centralized authorities on our economic lives. By placing trust in code rather than institutions, blockchain empowers individuals, reduces systemic inefficiencies, and could help prevent the kind of unchecked financial policies that contribute to economic disparity.
This shift towards a more equitable financial ecosystem is why understanding and adopting blockchain is crucial in our quest for a fairer economic structure.
Uluc Yuca
