Cullen Roche has another ‘there’s no printing money’ article.

I never stop seeing the term “money printing” all over the place. It has to be the most abused term in all of economics and finance. The madness must end! So let’s try to make this so simple that a 6 year old could understand it.

Who knows, even Cullen might finally understand.

1) Banks create most of the money in our system. Loans create deposits and deposits are, by far, the most dominant form of money in the economy. So, if you want to say someone “prints money” you would be most accurate saying that banks print money.

And how do they do this? Through fractional reserve lending. The ‘reserve rate is 10%’ so, for every demand deposit created they can lend 90% of that as a new loan. This multiplies the ‘money supply’ by approximately 10X. A $100 demand deposit creates $1000 in the economy. So money is created [printed] by the banking system.

2) The government is a user of bank money. When the government taxes Paul they take Paul’s bank money and redistribute it to Peter when they spend.

Yes they do. Re-distributive policy.

3) If the government runs a budget deficit (taxes less than it spends) then Paul buys a bond from the government and the government gives Paul’s bank deposit (which he used to buy the bond with) to Peter. Paul gets a bond which the government created in much the same way that a private corporation creates a bond when they issue corporate debt. If you want to say these entities “print” financial assets then fine. Corporations print stocks and bonds every day and you don’t hear the world exploding with hyperinflation rants because of it….

Yes they can…but they haven’t bothered unduly with that for decades. They can also create a bond [debt] that they sell to the Federal Reserve. Which they do all the time.

Where does the Federal Reserve get the ‘money’ to purchase these bonds [debt] that constitute ‘deficit’ spending? They simply ‘create’ a demand deposit in the governments name. The government then ‘spends’ the money on goods/services in the economy. New money has been created, ‘printed’ in effect.

4) When the Fed performs quantitative easing they perform open market operations (just like they have for decades) which involve a clean asset swap where the bank essentially exchanges reserves for t-bonds. The private sector loses a financial asset (the t-bond) and gains another (the reserves or deposits). The result is no change in private sector net financial assets. QE is a lot like changing your savings account into a checking account and then claiming you have more “money”. No, the composition of your savings changed, but you don’t have more savings.

Correct. And where does the Federal Reserve get the ‘money’ to purchase assets from? See above. They simply credit an account as a demand deposit and create the ‘money’, or, print it. The issue is…if, someone, China, demand that deposit in cash, then the Treasury will print the currency demanded. Hence, the creation of demand deposits retains its ‘printing’ label, even though initially it starts out life as an electronic credit to an account.

5) Cash notes like the ones you have in your wallet are created by the US Treasury and are issued to the Federal Reserve upon demand by member banks. This cash is literally “printed” by the Treasury, but serves primarily as a way for banks to service their customers. In other words, if you have a bank account you can exchange your bank deposit for cash from the ATM or the bank teller. Cash is preceded by the dominant form of money, bank money. But it doesn’t get printed off the presses and fired into the economy as some would have us believe.

Errrr, yes, that’s precisely what happens when ‘cash’ is demanded. In 2008 when the demand for ‘cash’ exceeded by many multiples the available cash against demand deposits, the financial system suffered its meltdown. That is the risk of creating money through debt.

See, there’s no “money printing” in any of this unless you want to distort the role of cash in the economy or refer to lending and security issuance as money printing. Yes, QE alters the composition of private financial assets, but that’s about it. No real “money printing” there either. So, next time someone goes off on a “money printing” rant just point them in the direction of these 5 easy to understand steps.

Cullen is incorrect.



M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler’s checks, demand deposits, and OCDs, each seasonally adjusted separately.