Academic journal article ABA Banking Journal

QE2 Akin to Printing Money? I Am Shocked!

Academic journal article ABA Banking Journal

QE2 Akin to Printing Money? I Am Shocked!

Article excerpt

Every student who took Economics 101 and stayed awake during the lectures learned that the Federal Reserve has the power to create credit figuratively "out of thin air." The A-students also learned that the commercial banking system, not individual banks, under the fractional-reserve system that we and every other developed economy has also has the power to figuratively create credit out of thin air if the Federal Reserve first provides the "seed" money to do so. So, when there is an increase in the sum of Federal Reserve credit and commercial banking system credit, credit is created out of thin air, which is akin to "printing money." When there is an increase in the sum of Federal Reserve credit and commercial banking system credit, some entity's debt is being "monetized."

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Until the first round of quantitative easing was initiated by the Fed at the end of November 2008, the Fed had mostly restricted its debt monetization to Federal debt. Then, in the first round of quantitative easing, the Fed began monetizing large amounts of private debt in the form of mortgage-backed securities. Because Treasury securities comprise a small proportion of commercial banking system credit, the bulk of debt monetized by the commercial banking system is private debt.

The chart shows the history of money printing/debt monetization from 1950 through 2009 in the U.S. The median annual percentage change during this period was 7.5%. In 2009, for the first time during this period, money printing/debt monetization contracted. …

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