Let’s start with: if the Fed sells bonds that shrinks the money supply. The rest of what you wrote is also complete nonsense.
Well, then, please enlighten us.
Correct my nonsense, other than a not-very-factually-useful blanket denunciation.
Try reading my first response in the thread, or other subsequent comments. Get pissy all you want, but I’m really not sure why you’d feel the urge to write an FQ response on something technical that you know nothing about.
I think you managed to avoid describing where cash comes from. It seems like a good opportunity to further share your obvious expertise.
I think most money isn’t in the form of cash or coins but numbers in hard drives, and most of it created by commercial banks as they extend loans. In addition, there’s a money multipler, where banks can lend more than what they have. Finally, money is part of a credit system which is much larger.
Just to be clear, if we’re discussing budget deficits and the like, currency is a small part of the story. Here are some figures from December 2023:
Currency: $2.2 trillion
Demand deposits aka checking accounts: $5.0 trillion
M1 = Currency + demand deposits + MMDAs and other liquid deposits since May 2020: $18.1 trillion
There are also wider definitions of money called M2 ($20.9 trillion) and M3 (discontinued since 2006).
The Fed buys and sells bonds in order to set the overnight interest rate for funds traded between banks (the fed funds rate). That rate in turn affects longer term bonds going out to 30 years or more (term structure of interest rates is the concept).
The banks holding most of this money decide how much they want in the form of currency, depending upon their customer’s preferences. They send currency to the Fed to be processed (older bills get shredded) and receive bills from the Fed in exchange for their bank deposits. The Fed receives fresh bills from the Bureau of Engraving and coins from the United States Mint.
Open market operations, money supply and the like. The framework for understanding monetary policy shifted after the Great Recession of 2008-2009. The Fed manipulates interest rates through a more complicated set of operations than they used to. For example, the Fed now pays interest on bank reserves, so they lend as well as borrow from the banking system. Further details are here: The Fed’s New Monetary Policy Tools | St. Louis Fed
This chart shows how Open Market Operations used to set interest rates (chart A), but now no longer do (chart B). Someday we will go back to the old world, but nobody knows quite when.
No, the USA does not simply “print more money”…
We borrow it.
Right.
Nations with 1000% inflation are the ones who just print more Money.
Right.
Yes. The two are somewhat related but they are not the same at all.
So the $2 trillion in circulation who has it and where is the money? Is it mostly banks that have that money or people wallets?
Is there any debt for the $2 trillion in circulation? And if there is debt who has to pay the debt off and who holds the debt?
Mostly not banks. Notes are a pain, and banks would mostly prefer not to have to mess with them. They buy just as much as is needed to satisfy customer demand.
Printed notes and coins are funded in exactly the same manner as any other token representing money. Nowadays we talk of electronic money, but that is just a way of understanding that large scale money never gets moved about as cash but as inter-bank transactions. Doing it digitally is just a modern convenience. At base the federal reserve acts as the clearing house for banks. Moving physical paperwork about just gets replaced by digital transactions. The sum of all the tokens, printed notes, paper contracts, and digital is backed up, and limited, by the federal reserve.
What is perhaps the key point is that the US legislation explicitly prevents the issuing of notes and coins as a back door mechanism for creating money outwith the bonds and debt mechanism. Hence the curious loophole of the platinum coin.
As noted a number of times above. Not all countries have such limitations, and they pay for this with hyperinflation in times of economic difficulties.
These lessons are hard won. Removing temptation from the hands of the executive and legislature is a recent phenomenon. Short term political gain in exchange for long term problems to come is not a choice that almost any politician facing reelection can be trusted with, no matter what political colour.
I think the question is, and if it has been answered I did not see it, the BEP has a stack of $20 bills sitting there. What is the process for those bills to get into general circulation other than replacing worn bills sent in?
The OP very obviously wants a grade school explanation of this stuff. We’ve been providing a grad school explanation as we talk to each other way over his head.
Holy impedance mismatch, Batman!!
I’m not a finance guy, but I think the answer you are looking for is that newly orinted money enters the economy when the Fed sends it to banks (mostly commercial banks, I think) to shore up rheir cash reserves. Banks take old money out of circulation as well.
But for every physical dollar printed, 100 more are created through simple electronic transactions.
Well, upper division at least. Maybe econ 101 in a really good college.
The term “eurodollars” is used to describe American-denominated currency - electronic and hard currency bills - held outside the USA. It’s not just drug dealers.
The rest of the world holds a great deal of U.S. currency, i.e., cash. Although the amount can’t be precisely tracked, the Federal Reserve Board of Governors recently estimated that foreigners held $950 billion in U.S. banknotes at the end of the first quarter of 2021, or about 45% of all Federal Reserve notes outstanding, including two-thirds of all $100 bills. Overall holdings of U.S. currency have grown rapidly, however, and overseas holdings of Federal Reserve notes would now be worth closer to $1.1 trillion if such holdings are still half of all U.S. currency.
It’s not just drug dealers. The demand for US cash is most noticeable where local currency confidence is weak. For example, when I went to Egypt, the locals loved getting US or Euro bills instead of Egyptian pounds. Whatever the government did with currency could be unreliable. The dollar was almost a parallel currency. (Dollars were good because they came in $1 bills too, while Euros smaller than 5E were coins; nobody wanted to fiddle with coins.) India by contrast seemed to take pride in their currency, and there was a lot less use of US dollars.
Another side note was that there was a lot of counterfeit US$ in circulation out there. When I went to Africa, the warning for tourists was that the locals wanted bills printed after 2002(?) with more complex anti-counterfeit features.
Yeah, I exaggerated the gap a bit for alliterative effect.
But IMO my point stands that the poor guy is bewildered on the sidelines watching terminology fly by.
Yes, and I think one important thing that hasn’t been said is “printing money” is often a metaphor. The government is not actually creating more money by firing up a printing press, and churning out $20 bills. New cash is manufactured all of the time, and that is technically printing money, but is usually quite different from what is meant when some pundit complains about the government “printing money.”
The question asked is legitimate though, when the government does create a new stack of $20 bills, is that new money (not cash) that is created? Does some account decrease by the amount printed, just like if I go to the ATM and withdraw a stack of $20s? Is that new money backed by a debt someplace, like if I used my credit card to get the stack of $20s instead of my debit card.
Money held by banks is called vault cash, and it amounts to about $100 billion. It can be used as reserves, so it’s not a total waste. A surprising amount of currency is held in the form of $100 bills, often in other countries by its citizenry as a store of value and a means of transaction when the country has high inflation.
Each bill has an assurance by the government that this is actual money: “This note is legal tender for all debts public and private.” The claim isn’t strictly accurate, as private businesses can accept any form of money that they want. But you can use it to pay your taxes. The Fed - Is it legal for a business in the United States to refuse cash as a form of payment?
So where is the other money has we are talking 2 trillion US dollars?
Is it mostly held in other countries or people wallets?
But if bank orders money from Bureau of Engraving & Printing or Federal Reserve is there not debt?
For every dollar printed is that not debt that some one getting that money has to pay debt.
So the Bureau of Engraving & Printing or Federal Reserve will say here is $100 you want but you have debt now say $300?
I think the statement is accurate, as stated, because it doesn’t state that it must be accepted as payment for a transaction, only to settle a debt.
But on the other hand, my credit card says I must make payment checks payable in U.S. funds drawn on a U.S. bank. It would be interesting to see if it is legal to cram a bunch of bills into a return envelope for a credit card and claim the debt is paid. It may be that the provisions the bank makes are legal in that the debt is settled in dollars, and the form of payment can be enforced via the mail - especially if it is also possible to walk into a branch of that bank with a lot of cash and plunk it down in front of a teller to pay the debt if the customer desired - just less convenient.