The Fed printing money? How absurd! And scary.
Mr. Ben Bernanke. Mythbuster!
鈥淥ne myth that鈥檚 out there,鈥� he told 60 Minutes, 鈥渋s that what we鈥檙e doing is printing money.鈥�
Ha. Ha. Ha. Can you imagine anything so laughable? So ridiculous? So absurd?
And to think that even we, at The Daily Reckoning, believed it. How could we be so credulous?
Of course, the Fed is not printing up money. How could we have been so na茂ve? The days of printing up money are long gone. Now, the Fed doesn鈥檛 do anything of the sort. Instead, it merely buys US government debt from banks. That鈥檚 not printing money. Nope. Not at all. Not even close.
But wait. How does it pay for the bills, notes and bonds it buys?
Oh, well, it certainly doesn鈥檛 print up money. Instead, it merely credits the banks with the money鈥lectronically. No printing involved. The banks then have money that didn鈥檛 exist before.
The banks are supposed to lend it out. For every dollar they get from the Fed they can lend out 10. That鈥檚 how it works. So, IF anyone wanted to borrow the money, and IF the Fed had bought, say, $1 trillion worth of US government debt, the banks COULD lend ten times that amount鈥hus increasing the supply of money in circulation by $10 trillion.
Does that sound like printing money to you?
Nah鈥� Of course not. Does it sound like it might cause inflation? Well, yes鈥� It would be rather surprising if it didn鈥檛. Consumer price inflation is now running at about 1% per year. Why so low? Because, so far, the banks aren鈥檛 lending. The Fed adds money to the system. But it doesn鈥檛 get passed along.
Why not? Because we鈥檙e in a Great Correction. The economy is saturated with debt. People are trying to dry out. And no matter how many times the Fed offers them a drink; they鈥檙e still on the wagon.
Of course, if the economy were to go on a binge again, the banks would lend, people would borrow, and all that money the Fed didn鈥檛 print would suddenly come out of hiding. Consumer prices would go up. Hyperinflation could come quickly.
Then what would Mr. Bernanke do? He says he would raise interest rates immediately, should the CPI hit 2%.
Well, dear reader, do you believe him? We do. At least as much as we believe he鈥檚 not printing money.
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