How the Money Supply is Expanded

[inactive]

I hate, HATE, HATE when I read threads talking about how the government (or the Fed, if you prefer) primarily causes inflation by printing money. Before anyone else comments incorrectly about it, can we all please do some reading to understand how money is created:

http://en.wikipedia.org/wiki/Money_supply

There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits (depositors' easily-accessed assets on the books of financial institutions).

http://en.wikipedia.org/wiki/Money_creation

Contrary to popular belief, money creation in a modern economy does not directly involve the manufacturing of new physical money, such as paper currency or metal coins. Instead, when the central bank expands the money supply through open market operations (e.g. by purchasing government bonds), it credits the accounts that commercial banks hold at the central bank (termed high powered money). Commercial banks may draw on these accounts to withdraw physical money from the central bank. Commercial banks may also return soiled or spoiled currency to the central bank in exchange for new currency.

http://en.wikipedia.org/wiki/Fractional-reserve_banking

When a deposit of central bank money is made at a commercial bank, the central bank money is removed from circulation and added to the commercial banks' reserves (it is no longer counted as part of m1 money supply). Simultaneously, an equal amount of new commercial bank money is created in the form of bank deposits. When a loan is made by the commercial bank (which keeps only a fraction of the central bank money as reserves), using the central bank money from the commercial bank's reserves, the m1 money supply expands by the size of the loan. This process is called deposit multiplication

 

[poopgiggle]

But...but...Ron Paul told me that the Federal Reserve is printing barrels of money so we can ship it all to China!

There's a reason Austrian School economics is called a heterodox school of thought. I think that legitimate gripes about the economy combined with an anti-intellectual distrust of the academic establishment has led to all this anti-Fed sentiment.

The manner in which the ideas of Keynes (or even Friedman) have been implemented by our government is imperfect at best, so I don't think it's fair to blame the current situation on them. Blame the political machine that makes economic decisions.

 

[Perrone]

The best resources you could find are wikipedia? Really?

I read a book once that said money grows on trees...been looking for one of those darn things for years.

 

[Blinocac200sx]

Ok, I'll agree not to use this terminology any more if you'll agree to never call people who illegally break into computer and data systems "hackers".

 

[poopgiggle]

The best resources you could find are wikipedia? Really?

I read a book once that said money grows on trees...been looking for one of those darn things for years.

And what would you suggest as an alternative? Wikipedia articles typically cite academic sources, so you're free to scroll to the bottom to read those. Of all the freely-available Internet sources, Wikipedia is probably the best.

In before someone posts something from mises.org

 

[Perrone]

And what would you suggest as an alternative? Wikipedia articles typically cite academic sources, so you're free to scroll to the bottom to read those. Of all the freely-available Internet sources, Wikipedia is probably the best.

In before someone posts something from mises.org

Maybe those academic sources Anyone can submit an article on wikipedia and then list a bunch of sites at the bottom. I like to go through them and see how many of the sources they list are even accurate themselves. Just saying wikipedia is a crappy resource. Why do you think colleges don't allow them to be cited?

 

[poopgiggle]

Ok, I'll agree not to use this terminology any more if you'll agree to never call people who illegally break into computer and data systems "hackers".

I used to make this argument but common usage has made "hacker" synonymous with a security cracker. The term "hacker" in the traditional sense is pretty closely linked to the modern definition IMO, but that's sort of an involved conversation for another thread.

However, "printing money" isn't as nebulous of a term as "hacker." It denotes printing physical money, which isn't what the Fed does at all.

 

[poopgiggle]

Why do you think colleges don't allow them to be cited?

Because you should be citing primary sources in academic writing, and Wikipedia is a secondary source. I haven't done any "HERE IS MY HISTORY REPORT ON WWII" type writing since high school, so for all I know they've loosened up on Wikipedia recently.

Asking for peer-reviewed primary sources on an Internet forum is unreasonable. I'm used to slogging through academic papers, but I don't think many people are.

 

[Perrone]

Because you should be citing primary sources in academic writing, and Wikipedia is a secondary source.

Asking for peer-reviewed primary sources on an Internet forum is unreasonable. I'm used to slogging through academic papers, but I don't think many people are.

You really are a party pooper huh..

 

[poopgiggle]

You really are a party pooper huh..

Well if you want to attack the veracity of his sources, bring more game than "LOL ANYONE CAN EDIT WIKIPEDIA HURRRRRRRRRRRRRRRRRRRRRRRR."