Many people don't know that central bankers literally, not figuratively, mean CREATE money out of nothing.
As long as you can separate "money" from its representation, there is nothing particularly problematic about some people being able to create money, at least some of the time. In fact it is necessary to provide money with liquidity as the economy grows and money is needed for more and more things (liquidity problems have triggered or worsened economic crises several times in history, especially when countries were trying to base their money on weights of metals).
1. The dollar itself was created two centuries before the US left the gold standard. "Created" being the operative word. Created by Congress because America needed its own national currency.
2. Anyone who dug some gold up in their backyard was creating money when we were on the gold standard.
3. In 1862 paper money became legal tender in the USA without any guaranteed convertibility to any metal; that remained the situation until 1879. I.e. the government simply created money.
4. On January 31, 1934, the US dollar was devalued from $20.67 per gold ounce to $34. In other words money was created by an act of Congress.
Or to sum all that up for you: at a minimum Congress has always had the power to create money. All the metallic standards ever conceived of have been arbitrarily decided and governments have always had the ability to change the standard at will to create more money.
Before 1971 dollars were backed by Gold, now they are backed by US Tbills (and some real-estate since 2008).
It's not that different.
Gold and US TBills are both valuable assets.
What the OP meant by creating money out of nothing was fiat currency, which we do have now.
If you decide to use a commodity also as money, that's fundamentally different, and econ textbooks can confirm this for you.
T-Bills are backed by fiat currency, not by a commodity.
The Fed, and also the banks through fractional reserve banking, genuinely do create "money out of nothing."
Check out A Monetary History of the US by Milton Friedman and Anna Schwarz. Here you will find a Nobel Prize winning econonist who wanted to dramatically reign in, or even end, the Fed and get rid of fractional reserve banking.
TBills just bonds. They are 'backed' by the US Governments credibility to pay back the loan.
USD is generally backed by an asset - fractional reserving not withstanding.
No, this is not true.
Central banks do 'create' money, but they trade it on the market for real assets.
The Fed creates dollars and exchanges them for an equal amount of US Tbills (bought at market rates). $1 created = $1 in Tbills on their balance sheet.
They're not just creating money and keeping it, or giving it away.
The practice of 'fractional lending' by retail/commercial banks amplifies this, but as far as central banks go - every dollar they 'create' is essentially backed by an asset that they keep on the books for that dollar.
The idea is to manage how much currency is in circulation at any given time, so that inflation (and employment) hover at certain target.
If politicians were 'printing money' to pay national debts, or buy stuff or whatever - that would be straight forward dilution.
What the Fed does is not dilution, and it's not a bad thing, it's a good thing.
Same for ECB.
At the summit of the tree the assets are just 'other assets'. An accounting fiction.
The state can purchase whatever is for sale in the token it controls. And it can make sure there are things available for sale by imposing a liability on you in that token you cannot avoid.
The value then depends upon how much stuff the state extracts for the public purpose in return for its token. And the belief in the coercive power that gives that process weight.
1) The private sector is experiencing falling savings.
2) The government is likely on the precipice of expanding its dis-saving in the form of greater deficits.
Not to state the obvious, but all else equal, if the Fed started shedding assets at $30 billion a month (or $360 billion a year), it would exhaust the entire stock of private savings. This doesn’t allow for larger government deficits. Given the current savings level, it is mathematically impossible for the Fed to shed assets at $50 billion/month. By 2019, as we are farther out from peak net savings rates set in 2015, it is likely the stock of private savings is smaller still, and hence the ability for the Fed to shed assets at a rate of $50 billion/month is utterly impossible. Net savings have fallen in the last 2 years from a peak of just over $700 billion to the current $355 billion. Will savings halve again in the next two years? If so, there is no mathematical way in the world the Fed can shed assets at the rate it outlined yesterday."
I tend to side with the uneducated who think the FED prints money out of thin air because it is closer to the truth of the matter of where real economic value exists moreso than the anachronistic mechanics of FED policy three card monte. When all is said and done, the FED took on toxic assets it will not be able to unload into a weak economy. The only hope it has is to sell the assets at face value in exchange for inflated dollars or hope the economy booms beyond everyone's expectations in the next two years. Sure hope the latter happens because otherwise the FED has done nothing but defer the pain of 2007 into the catastrophe of 2020.
I'm already over simplifying, but here is a less abstract illustration: Imagine you lose your job and you need some money to get back on your feet. You borrow against a line of credit to cover living expenses. You find another job but it doesn't pay enough to cover your standard of living, so you keep the line of credit open and just make the minimum payments. You are the US economy and the line of credit is the FED right now. If the line of credit is not paid off, if you lose your job again, there will be nothing to borrow against or even make the minimum payments. The smart thing to do is pay off the credit card balance so you can use it again if you're in trouble. The problem is you can't do that unless you cut back on spending... and this is why the FED always points out that the control of the situation is not with the FED but with congress, they need to cut spending... <insert laugh track>
And I didn't even address your exact point. This is just the "non-toxic treasuries". The toxic stuff is non performing home loans. Imagine trying to sell those back to someone! Are you willing to buy them?
More info here: https://www.newyorkfed.org/markets/mbs_faq.html
A private bank. It prints a dollar and either: (1)buys a T-Bill with it through the FOMC, or (2) lends it out through the discount window (only to big banks, not to Americans directlt), or since 2008, buys "toxic assets" with it.
How many dollars are printed is decided by unelected technocrats with no public transparency, oversight or accountability.
What the Fed also does is insure the banks because they are for some ungodly reason allowed to lend out over 10x more money than they have (to increase the money supply, econ textbooks say).
There are a lot of people who have said something between 'the Fed is a welfare system for the rich that steals from the poor' to 'it should be ended,' including Bernie Sanders, Milton Friedman, Aaron Schwartz.
In fact during the Civil War Lincoln actually ignored the banks who were all betting against him. He used the a constitutional right to print money through congress and it worked.
In academia, the groupthink around the Fed is strong. Think stronger than Challenger Disaster groupthink. And they're almost all in favor of it.
Exactly what the parent said.
The fact it is used to buy TBills is irrelevant: the Fed creates money out of thin air. Period.
Having the Fed inject money into the system is a dodge, but effectively the same thing. It gets the treasury off the hook, because they can say they are "borrowing" rather than "printing" money.
It's unclear to me why this bothers people so much?
The point is it’s backed by an asset
Yes it's still backed but less than before, i.e., devalued.
1 Trillion in Assets = 1 Trillion in Currency.
1 Trillion + 1 dollar in Assets = 1 Trillion + 1 Dollar in currency.
No dilution by the Fed.
(Fractional lending notwithstanding - that's another can of worms)
But you cannot eat a dollar or play games on a dollar or drive with it. In and of itself a dollar is just a piece of paper and has an intrinsic value of say 1ct.
So adding a paper note to the economy increases the backing by 1ct and the currency by 1$. Adding an iPhone increases the assets by say 100$ (just made that up by taking 500$ cost - 400$ used materials) and leaves the currency as it is.
Hmm, now that I think of it: Are you maybe talking about accounting?
Heyzeus its extremely relevant.
HNers are having conspiracy issues with this.
* Obviously if there is going to be more money in circulation, it needs be 'created' somehow *
But that it is traded for a specific asset, which is kept on a balance sheet - and the 'reverse' can be done to pull the currency out of circulation - is * hugely relevant *.