> > Laurent writes: > > > The fed does not create new money: only private banks do create money > > > each time they make a loan and they have this right in exchange for > > > following bank regulations.
me: > > Laurent, that's only according to a narrow interpretation of "money > > creation." The Fed does not create money (i.e., currency) as in > > "printing it" and droppng it from its Milton Friedman Memorial fleet > > of helicopters. (Ben Bernanke once suggested that it could, BTW.) > > However, it does create -- or rather, increase or decrease -- the > > monetary base (the stock of high-powered money). That magnitude refers > > to the monetary liabilities of the Fed, i.e., bank reserves and > > currency. The Fed can and does increase those, which almost always has > > the impact of increasing the money supply. > > > > And when banks want to convert the bookkeeping entries called bank > > reserves into currency, the Fed _will_ print it. This converts one > > kind of Fed IOU into another. Laurent: > To put things into perspective: the Z1 of Q2 2007 says that Fed assets > and liabilities are around 0.9 trillions (page 68) and that > total outstanding debt is 45 trillions including 7.2 trillions > of federal and local government debt the rest being private (page 8). > > Of course you can label the 2% base "high powered" money but for all > practical purposes the remaining 98% are money too and they've been > printed by private banks not the Fed :). Wait! you switched from talking about money (as conventionally defined: M1, M2 or whatever) to talking about total debt. Now you can argue about definitions, but I meant the standard definition of the money supply, as most economists do when they don't add qualifications. Note that I don't think that the Fed has much if any control over the money supply, however defined. Rather, it has a lot of impact on short-term interest rates. And I agree that the total debt is more important to determining the dynamics of the economy than M1, M2 or whatever is. > PS: the astute reader will have noticed that USA fed/gov debt makes > 99.99999% of the headlines and papers but count for less than 20% of > total USA debt, the other 80% is unknown to MSN and most economists. > One sector debt has (nominally) doubled in the last 8 years and just > reached 100% of GDP without "anyone" noticing. "One sector debt" = ?? in any event, private debt is much much more serious than the government's debt, since the US government is not going to go bankrupt in the foreseeable future. I totally agree that the government's debt gets much too much airplay and print. -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.
