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rsm's avatar

"money comes from somewhere (income or borrowing) and goes somewhere (spending or lending). "

Doesn't this gloss over the fact that the monetary expansion in the Fed's balance sheet, as represented in the first figure in the blog, came from nowhere?

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Daniel H. Neilson's avatar

It is true that the Fed can expand its balance sheet, on both sides, when it wants to. But anyone can do that by borrowing and using the proceeds to buy something. I think that when people call it "printing money," or even "money creation," that sounds like a one-sided operation when it is not: it is a two-sided operation. "Money creation" is new intermediation, coming from somewhere and going somewhere as it passes through the Fed's balance sheet.

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rsm's avatar

Is it possible you have a blindspot on this? Whose account was debited, i.e. from whom did the Fed borrow, to fund quantitative easing?

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Daniel H. Neilson's avatar

It's always possible! But QE has been funded by expansion of reserves, i.e. by borrowing from the US commercial banking system, and more recently by borrowing from the US Treasury through the TGA, and from money market funds through the ON RRP facility.

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rsm's avatar

Doesn't Eric Lonergan conclusively dismiss your perspective in https://www.philosophyofmoney.net/qe-is-debt-reduction/ ?

"The conventional argument now seems to be that QE simply converts fixed rate government liabilities into liabilities at overnight rates [2] [...]

"[2] This paper by Robert Hall and Riccardo Reis is a good example, it even describes money printing through reserve creation as ‘borrowing from commercial banks”, by the same linguistic rule you would say central banks are ‘borrowing from the general public when they issue notes and coins’ – which doesn’t even make sense. This is a good example of the problems economics faces in using natural language to describe objective diverse phenomena. As occurs frequently in natural and unscientific languages, economists have a terrible habit of using the same terms to identifying distinct phenomena. It often starts as a metaphor – signalled by inverted commas – and morphs seamlessly into a (false) identity. Base money is the purest form means of payment, which is created at will by the central bank and defines monetary policy – no one does any borrowing or lending, as this short note will make clear."

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Yang, Youngbin's avatar

Your blog has been very helpful for me to understand how money and banking operate. I hope you get back soon. From Korean follower

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Veridelisi's avatar

we love you man (turkish followers)

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