When you go to your community bank to get a loan for a new Subaru Outback AWD, complete with "Wag More, Bark Less" and "COEXIST" stickers, your banker is extending you credit. The banker is loaning you money he borrowed from someone else at a lower rate (depositors). You take the money you borrowed from
They deposit that money into
The money is cycled from China back into US Treasury bonds to keep Americans buying stuff they don't need, that they can't afford, with money they don't have. The US taxpayer pays interest on that debt so China can buy weapons to kill the children of the debt zombies graduating from American degree mills with PhDs in Ethnic/Gender studies.
That's how "normal" banking works. That same money deposited in
The FED has that ability, but also has the ability to generate credit out of thin air (ex nihilio). Most people who know only enough to get them a talk show on cable or AM radio confuse this with "printing" money. Sure, it looks, smells, walks, talks, and tastes like money printing, but it is not.
Here is how it works.
The US Treasury, under the steady hand of Turbo Tax Timmy Geithner, needs $100,000,000 in cash printed up for buying nudie scanners for TSA. Timmy is the exchequer for the United States government, and he goes to the same place you would go to get some Benjis for a wild weekend in Vegas - the bank. His checking account is at the FEDERAL RESERVE. Timmy calls Ben Bernanke and orders up his money, but Ben doesn't do the printing - the US Treasury does.
Ben waives his magic wand and "presto" there is $100,000,000 credit issued to the United States Treasury that appears as an asset to the Treasury and a liability to the FED. So far, the books for that transaction are kinda balanced. We can clearly see where the $100,000,000 came from and where it is now. Timmy issues Ben a Treasury Bond worth $100,000,000, shown as an asset to the FED and a liability to the Treasury.
For those playing the home edition, we have:
Ben has an asset (Timmy's T Bond) worth $100,000,000 and a liability of the same (ex nihilio credit entry).
Ben's books are balanced. The FED is worth no more today than it was last week.
Timmy has an asset worth $100,000,000 (Ben's credit that he may convert to a million C-notes if he wants via the US Bureau of Engraving), as well as a $100,000,000 liability (the IOU that he gave Ben). The US Treasury is worth no more today than it was a week ago.
So far, so good?
There is, however, $100,000,000 more money in circulation today than we had last week. GDP isn't up $100,000,000 in the same time frame, so we have some inflation. Circulation/GDP has gone up.
The gold bugs, AM/cable talk show hosts, and Ron Paul all have a grand mal, foam at the mouth, and bloviate endlessly about the FED "printing" our way to eternal fiscal damnation.
Here is what they are missing.
The US Treasury, through its 110,000 thugs called IRS Agents, scurry about the private economy shaking people down to part with their money and giving them nothing in return, other than the courtesy of not dragging them out of their house and shooting them.
Money is being taken out of the economy after GDP is produced, which is deflationary.
That money goes to the Treasury and back to the FEDERAL RESERVE to extinguish the T Bond. Once Timmy pays Ben the $100,000,000, the T Bond is put in the round file, the ex nihilio credit entry is erased, and $100,000,000 worth of GDP is now circulating in the economy and chasing the extra $100,000,000 that Timmy put in there. The money that appeared out of the ether, now disappears into the ether.
The FED's books are clear and balanced.
The Treasury's books are clear and balanced.
The private economy has $100,000,000 of extra money in it covering $100,000,000 worth of new GDP, which all other things being equal, means the dollar is the same it was before we began this little exercise.
Where is the "print?"
The problem comes when the FED generates SO MUCH ex nihilio credit that it can't drain it due to the sheer size of the credit entry. If the credit doesn't actually produce anything, but just goes to bail out other bad debt, the economy can't "grow" its way out of the mess. That pretty much sums up what we have been doing. The IER does admit that the potential for a de facto "print" to take place, but that would only happen in the complete collapse of both the underlying economy and the dollar itself. When that happens, it's August 24, 410 AD all over again, and the Second Dark Age is upon us.
Those issues are beyond the scope of the Institute For Economic Reality.
Ernst Stavro Bloviator, Senior Fellow, IER