The Fed Does Not Print Money!

Just when I thought that unions and Maxine Waters were the only people who could make my teeth itch, here come the idiots that keep saying, “the Fed prints money.”  First of all, anyone who says this is either ignorant or nefarious.  Now ignorance is a simple condition reflecting a lack of knowledge.  We are all ignorant of one thing or another.  I recently had to ask my Facebook friends who or what these, “angry birds” were that I kept seeing references to.   I am so notoriously ignorant of, “techno” things that I assumed for years that you could play both sides of a CD.   Ignorance is a constant condition, remedied by knowledge, which is why we should all be learning new things every day.  [The man who does not read has no advantage over the man who can not.  Benjamin Franklin] 

            If you are misstating facts you might be ignorant, but if you know the truth and misstate it, then you are a duplicitous, lying rat.  People who make the ridiculous statement that the Federal Reserve System prints money are wrong.  If you are ignorant, read on and educate yourself.  If you are a liar, go off in a corner and know that you are recognized for what you are! 

            When hearing that the Fed prints money the first thing you should know is that the statement is simply incorrect on its surface.  It is not the Fed but the Treasury Department that prints our currency.  These two agencies are in no way related.  They share neither funding, responsibility nor personnel.   The Fed routinely destroys old, mangled, dirty or otherwise corrupted bills.  They then request the U. S. Treasury to replace that currency by printing it in the denomination needed.  The Fed must also hold as collateral securities (usually government bonds or gold certificates) equal to the amount of currency it has put in circulation.  This number is finite and relatively stable.

            But we are talking about more than just a semantic difference.  The Fed does not finance governmental deficit spending by printing more money.  It does not.  It has not.  It can not.  The Fed can purchase U. S. Treasury securities, but only from open market operations.  It is prohibited, by law, from purchasing these directly from the government.  The government must first find a buyer for its securities in the public sector (you, me, banks, corporations, or foreign governments).  Then the Fed can buy from those persons or entities that own these bonds.  When the Fed buys securities, it creates a reserve of cash in the banks, which banks can use (or not!) for the purpose of lending.  It is when banks lend money that revenue is generated.  But of course who uses it, and for what, is up to the banking system and the public. 

            Most of the securities the Fed buys are old ones, preowned if you will.  The price is determined by supply and demand.  It is you, the bank, and individual investors who choose whether or not to buy or sell securities, to borrow or lend, to create or inhibit demand for money.  It is in loaning you money that a bank (not the Fed), “creates” wealth.  And, yes, when you pay off your loan that same wealth is annihilated.  It isn’t the Fed that creates or destroys money, it is you. 

            I used to teach economics at the local community college.  I can not condense an entire semester into 600 words so let me condense my message into 6 words.  The Fed does not print money!  

            Learn! And keep the faith.