The Result of the Impending Inflation

[Paulie]

The Federal Reserve can NOT put money into circulation.

You're kidding me, right? the Fed can do exactly that , it's called monetization of debt the FOMC does it by buying debt instruments on the open market for cash, this results directly in increasing the money supply in circulation.

You are severely misinformed, my friend.

The Fed uses open market operations (treasury purchases and sales) to increase or decrease bank reserves. Those bank reserve increases are not inflationary in and of themselves until that money is then released into the economy by the participating member banks, either through lending, investing, or withdrawals.

This is the same for the purchase of debt instruments, such as MBS's. The Fed buys those debt instruments with newly created money, but it can not force those institutions it bought them from to lend that money, therefore it has no power to directly increase the amount of money in circulation.

For instance, when it bought ~80 billion of AIG debt, it injected liquidity into AIG, but it can not force AIG to lend that money to customers, or invest it. That money was meant to stablize AIG's balance sheet.

The fed can use tools to dissuade banks from lending, however, by SELLING securities and removing money on deposit in its member banks' reserves.

Just so we're clear, I'm not defending the Fed. I disagree with their mere existance, let alone anything they've been doing for the past year ESPECIALLY. I just want people to understand that the Fed can not simply increase the amount of money in circulation directly, at will. It can only add money to an institution's balance sheet. Whether that institution ever puts that money into circulation in any of several ways, is entirely out of the Fed's control.

 

[wimpy77]

The Federal Reserve can NOT put money into circulation.

You're kidding me, right? the Fed can do exactly that , it's called monetization of debt the FOMC does it by buying debt instruments on the open market for cash, this results directly in increasing the money supply in circulation.

You are severely misinformed, my friend.

The Fed uses open market operations (treasury purchases and sales) to increase or decrease bank reserves. Those bank reserve increases are not inflationary in and of themselves until that money is then released into the economy by the participating member banks, either through lending, investing, or withdrawals.

This is the same for the purchase of debt instruments, such as MBS's. The Fed buys those debt instruments with newly created money, but it can not force those institutions it bought them from to lend that money, therefore it has no power to directly increase the amount of money in circulation.

For instance, when it bought ~80 billion of AIG debt, it injected liquidity into AIG, but it can not force AIG to lend that money to customers, or invest it. That money was meant to stablize AIG's balance sheet.

The fed can use tools to dissuade banks from lending, however, by SELLING securities and removing money on deposit in its member banks' reserves.

Just so we're clear, I'm not defending the Fed. I disagree with their mere existance, let alone anything they've been doing for the past year ESPECIALLY. I just want people to understand that the Fed can not simply increase the amount of money in circulation directly, at will. It can only add money to an institution's balance sheet. Whether that institution ever puts that money into circulation in any of several ways, is entirely out of the Fed's control.

 

[code1211]

My take on all of this isn't very popular, but here goes again anyway.

The economy was never as bad as it was made out to be, and isn't as bad as they're still making it out to be. I don't think we're going to see the hyper-inflation we experienced in the mid-late 70s. I think there's way too many doomsayers and Chicken Little squawkers out there.

It might not be all that bad, but you just have to be impressed by 10% unemployment.

In Indianapolis right now, in summer, we have Dairy Queens shuttered.

Car dealers were closing before the rules of the bail out hit.

We have abandoned warehouses and we have numerous manufaturing plants that have shut down and numerous plants that are cut back so far, they might as well be shut down.

The stimulus is not a stimulus. So far it's a political graft and reward program. This is scaring me for real right now. The economy is not improving. It's getting worse. The stimulus program is withholding most of the funds for a later date.

The strings that the Feds want to put on the money are so distasteful that the recipients are backing away from it.

The Auto Company bail out was a "Save The Unions" boondogle and it's pretty widely accepted that the auto product was good, the productivity was good and service after the sale was good. What was it that destroyed the competitive edge of the Auto Companies? Hello! It was the Unions.

The doctor examined the patient and determined that the only way to save the patient was to strengthen the cancer.

As long as every question is answered by what is good for getting me elected next time, we're screwed.

You also have to be impressed by doubling the National Debt every 4 years.

 

[code1211]

The Federal Reserve can NOT put money into circulation.

You're kidding me, right? the Fed can do exactly that , it's called monetization of debt the FOMC does it by buying debt instruments on the open market for cash, this results directly in increasing the money supply in circulation.

You are severely misinformed, my friend.

The Fed uses open market operations (treasury purchases and sales) to increase or decrease bank reserves. Those bank reserve increases are not inflationary in and of themselves until that money is then released into the economy by the participating member banks, either through lending, investing, or withdrawals.

This is the same for the purchase of debt instruments, such as MBS's. The Fed buys those debt instruments with newly created money, but it can not force those institutions it bought them from to lend that money, therefore it has no power to directly increase the amount of money in circulation.

For instance, when it bought ~80 billion of AIG debt, it injected liquidity into AIG, but it can not force AIG to lend that money to customers, or invest it. That money was meant to stablize AIG's balance sheet.

The fed can use tools to dissuade banks from lending, however, by SELLING securities and removing money on deposit in its member banks' reserves.

Just so we're clear, I'm not defending the Fed. I disagree with their mere existance, let alone anything they've been doing for the past year ESPECIALLY. I just want people to understand that the Fed can not simply increase the amount of money in circulation directly, at will. It can only add money to an institution's balance sheet. Whether that institution ever puts that money into circulation in any of several ways, is entirely out of the Fed's control.

When an institution is going under, as in the case of GM or AIG, and the US Government injuects money that does not exist into that company, How is that not creating money out of thin air?

The USA is in debt and in deficit. If it gives money to anyone, whether by reducing the payroll tax or by giving away a trillion here and a trillion there, how is that not creating money?

In the case the reduced payroll tax, most people are spending that cash and in the Case of AIG or GM, payrolls are met, suppliers paid and so on.

By saying that the Fed is not doing this is too fine a line of detail to even see. The Government is doing it and the effect is the same.

 

[Paulie]

You're kidding me, right? the Fed can do exactly that , it's called monetization of debt the FOMC does it by buying debt instruments on the open market for cash, this results directly in increasing the money supply in circulation.

You are severely misinformed, my friend.

The Fed uses open market operations (treasury purchases and sales) to increase or decrease bank reserves. Those bank reserve increases are not inflationary in and of themselves until that money is then released into the economy by the participating member banks, either through lending, investing, or withdrawals.

This is the same for the purchase of debt instruments, such as MBS's. The Fed buys those debt instruments with newly created money, but it can not force those institutions it bought them from to lend that money, therefore it has no power to directly increase the amount of money in circulation.

For instance, when it bought ~80 billion of AIG debt, it injected liquidity into AIG, but it can not force AIG to lend that money to customers, or invest it. That money was meant to stablize AIG's balance sheet.

The fed can use tools to dissuade banks from lending, however, by SELLING securities and removing money on deposit in its member banks' reserves.

Just so we're clear, I'm not defending the Fed. I disagree with their mere existance, let alone anything they've been doing for the past year ESPECIALLY. I just want people to understand that the Fed can not simply increase the amount of money in circulation directly, at will. It can only add money to an institution's balance sheet. Whether that institution ever puts that money into circulation in any of several ways, is entirely out of the Fed's control.

When an institution is going under, as in the case of GM or AIG, and the US Government injuects money that does not exist into that company, How is that not creating money out of thin air?

The USA is in debt and in deficit. If it gives money to anyone, whether by reducing the payroll tax or by giving away a trillion here and a trillion there, how is that not creating money?

In the case the reduced payroll tax, most people are spending that cash and in the Case of AIG or GM, payrolls are met, suppliers paid and so on.

By saying that the Fed is not doing this is too fine a line of detail to even see. The Government is doing it and the effect is the same.

I never said it didn't create money out of thin air, in fact I said it DID create new money to fund their security purchases. But this does not mean that money is automatically entered into circulation. That newly created money then has to be put into circulation by whomever the Fed bought the securities from.

Therefore, the Fed can not, by itself, put new money into circulation. It has no power to force anyone to do so. So their moves only become inflationary at the point in time that the new money enters the economy and starts chasing goods and services.

The Fed could print 100 quadrillion dollars and enter that into the reserves of banks, but until those banks lend or invest that money, it is not inflationary.

 

[Neubarth]

Paulie, you seem to know what you are talking about on the topic above. Most everything you say is common sense if one looks at the reality. Most people can not see it unless they are told. If they still disagree, then they fall into the ranks of those who simply will not see.

Somebody on the board a week or so ago said that the FED printed our money. I always thought it was the Department of the Treasury. I know they are FEDeral Reserve Notes, but I thought the actual printing was done by Treasury.

Since I am too lazy today to research the topic, is it the Fed or is it the Treasury?

In either case, when money is printed upon request of the Fed, that could be seen as a direct infusion of money into the market. Right?

 

[Kevin_Kennedy]

Paulie, you seem to know what you are talking about on the topic above. Most everything you say is common sense if one looks at the reality. Most people can not see it unless they are told. If they still disagree, then they fall into the ranks of those who simply will not see.

Somebody on the board a week or so ago said that the FED printed our money. I always thought it was the Department of the Treasury. I know they are FEDeral Reserve Notes, but I thought the actual printing was done by Treasury.

Since I am too lazy today to research the topic, is it the Fed or is it the Treasury?

In either case, when money is printed upon request of the Fed, that could be seen as a direct infusion of money into the market. Right?

The Treasury actually prints the money. People say the Fed prints the money as a figure of speech. What they should say is that the Fed is able to create money out of thin air by the process that Paulie has already described.

 

[Paulie]

Paulie, you seem to know what you are talking about on the topic above. Most everything you say is common sense if one looks at the reality. Most people can not see it unless they are told. If they still disagree, then they fall into the ranks of those who simply will not see.

Somebody on the board a week or so ago said that the FED printed our money. I always thought it was the Department of the Treasury. I know they are FEDeral Reserve Notes, but I thought the actual printing was done by Treasury.

Since I am too lazy today to research the topic, is it the Fed or is it the Treasury?

In either case, when money is printed upon request of the Fed, that could be seen as a direct infusion of money into the market. Right?

Yeah, Kevin's right about the Treasury. The Treasury prints the actual physical notes, but when the Federal Reserve wants to increase an institution's reserves, it creates an entry "out of thin air" on its own balance sheet, to be used to purchase securities from that instution.

What some don't seem to understand though, is that money it bought the securities with is not automatically entered right into circulation. The Federal Reserve can not directly put money into circulation.

Countless things could potentially happen that would hinder an institution from putting their newly created Fed money into circulation. Not only can the Fed "sterilize" those reserve increases buy SELLING securities from its portfiolio (if it has any available, of course), but a plethora of unforeseen events could end up potentially hindering the release of that new money into the economy.

A good example would be: The Fed buys $500 billion in US Treasuries and other debt, from XYZ Bank in Bumblefuck, California. Not long afterwards, a major terrorist attack happens in the US, and now people are not borrowing ANYTHING, let alone spending. So now all that newly created money is just sitting on reserve, not actually in the economy chasing goods and services. At that point, who knows how long it could actually be before that bank ever ends up lending that money out, or investing it. It certainly wouldn't be a good time to invest, because of course the market would be tanking due to the terrorist attack.

That's just one example. Now maybe 5 years down the road, after the dust clears, people would get back to real life again, and maybe some of that money will be used in some way. But technically speaking, that money could POTENTIALLY sit on reserve FOREVER, without ever actually hitting the streets.

This is why SOME analysts think price inflation is 3, 4, maybe 5 years down the road. The banks are stuffed to the gills with new money right now, but where's the demand for it, considering how over-levereged so many people and businesses are already?