Fed Monetization – Not What It Buys, but How Much of Anything It Buys

Last week the Fed announced that it would purchase $300 billion of longer-maturity Treasury securities. The mainstream media got all excited, talking about the Fed “printing money.”

Last week the Fed announced that it would purchase $300 billion of longer-maturity Treasury securities. The mainstream media got all excited, talking about the Fed “printing money.” But the Fed figuratively “prints money” or creates credit whenever it acquires assets – loans or investments.

For example, when the Fed purchases a mortgage-backed security, it pays for the security simply by crediting the deposit (reserve) account of the security seller’s bank. The seller’s bank, in turn, credits the seller’s deposit account. If the seller happens to be a bank, then just the bank’s reserve account gets credited.

Either way, the Fed is figuratively creating credit and, in the case when the seller of the security is a nonbank, money “out of thin air.” To create credit out of thin air, it does not matter whether the Fed purchases a mortgage-backed security or a Treasury security. Moreover, when the Fed lends to banks through its discount window, it also is creating credit out of thin air. In fact, when the Fed pays its employees, it is creating credit and money out of thin air.

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