The Fed Doesn't Print Money: What Are Reserves
It is stunning how many people talk about money yet have no clue about monetary history. They do not even understand the most basic concepts about money, banking, and The Fed.
One area where there is a lot of confusion is with central bank reserves. This is evident by the statement "the printing press go brr". Anyone who says this obviously has no clue about how the system operates.
Being within the realm of cryptocurrency, if we are going to replace the existing financial system, it is best to understand how it actually works.
For this reason we will start with the most basic of concepts.
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The Fed Doesn't Print Money
Have you heard the story about JP Morgan (the man not the bank) saving the United States economy by bailing out the US government?
That is partially true.
In 1907, when panic struck the banking system. JP Morgan and other bankers got together to put up $25 million, a huge sum at the time, to back stop the banking system. But that was only one piece of the puzzle.
The U.S Treasury came up with $36 million that was deposited in New York City banks. This outpaces what Morgan and his investors came up with.
Again, this is only a part of the story.
The other piece is the clearing house associations spread throughout the country. They came up with $256 million. But this was not cash or even gold. Instead, they put forth clearing house loan certificates. These are inter-bank quasi money that allows banks to clear liabilities with other institutions within the system.
Essentially it is inter-bank credit and a vault substitute.
Notice how this is not cash, dollars, or specie of any kind. It is basically a bank token that was created by the clearinghouses.
We also have to mention this is before the creation of the Federal Reserve. Hence, when that was being developed, what do you think they did? The idea of being able to create an inter-bank credit to allow for the clearing of liabilities made sense. Therefore, it was incorporated.
Of course, nobody would mistake a clearing house loan certificate for US dollars. Why do they do it with central bank reserves?
Here is where the Fed's propaganda enters.
Cashless System Post-World War II
We hear a lot about the "war on cash".
The reality is the banking system got rid of cash a long time ago. Since the 1940s, settlements among the banks were done using a ledger based system, something akin to checks. Nobody was sending bags of money back and forth.
There is also another factor in this that is very revealing.
For decades, bank reserves with the central bank were non-existent. The Fed believed it could control things by making the reserve more (or less) expensive. Unfortunately for it, having a currency meant to replace cash when the banking system basically got rid of cash is useless. This is what the Fed found out.
Also, we hear a lot about reserve requirements. However, the banks get around whatever the Fed says be either turning to different products, such as non-bank money market fund which isnt subject to reserve requirements or simply enter the Eurodollar market to get a better rate than the Fed is offering.
Once again, it becomes very clear. The Fed doesn't print money. In fact, the only tool in its bag is to target the fed funds rate. That is the only move it truly has. It can change that and hope things work out.
Do you see why I repeatedly say the Fed is mostly a propaganda organization?
The reality is, when it comes to liquidity, the commercial banking system is in full control of that and the Fed wasn't invited. This is why we see a dollar shortage in spite of trillions in central bank reserves being printed.
These are not dollars. Reserves are not legal tender and cannot be held by private non-bank businesses or individuals. Remember, like a clearing house loan certificate, a reserve is nothing more than inter-bank credit. How can anyone consider that to be broad economy money?
The answer is that, if one knows how things operate, it is an impossible conclusion.
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Another good post, image is broken doh.
Works fine for me.
hmm
I actually thought gold was the reserve 😂
Many people are falsely taught this in school on purpose.
For real, still can’t believe I was mislead😂
It's very sneaky because this is how it used to work and schools just allow their students to believe that this is how it still works.
We tend to learn a lot outside school
But, If bank reserves aren't circulating, how do you think the Fed can still influence the economy?
I dont. It is all propaganda. They have to get the markets doing the heavy lifting for them.
Okay. No problem.
I appreciate the JP Morgan history. So the reserves are only really useful when the banks themselves are in trouble? Or because of the digital aspect, the banks still don't need these reserves?
Banks never relied upon reserves. Look at the history of the amount in circulation. They only started to grow after the Fed starts to pay interest on them (2007 or 2008). Before that, commercial banks had no use.
The banking system has ways around everything the Fed reqires. I mentioned a couple here.
As for banks, reserves are effective in aiding distressed banks in clearing their liabilities to other banks. Hence, if there is a massive outflow of deposits to other banks, like with Silicon Valley Bank, the reserves could be used to settle that.
Outside of that, there isnt much used for them that I can see because it is effectively inter-bank credit.
I see. Thank you for the detailed explanation.
I still haven't heard you talk about "Going Direct"
At this point it's irresponsible to pretend like this isn't the current path we are on.
You keep parroting this same message over and over without actually providing a valid counterpoint.
If the FED is not printing money then how is this obviously unfair system syphoning value from us plebs?
People don't want to be told they are wrong, and are much more receptive to learning how this transfer of value from rich to poor actually works. The underlying implied message that you are sending with these posts is that everything is fine because they don't print money. It is not fine. Everything is fucked, which is why you're here in the first place. Stop telling people why they are wrong and start telling them why they're fucked by the current system. The message will spread farther and wider.
I keep repeating the same thing because it seems people refuse to learn. For example:
Umm if the Fed was printing it, why did Blackrock (I presume Fink) say the next downturn, the Fed will need to go direct. If they were doing what so many claim, they would already be going direct and "injecting liquidity" into the system.
The central banks arent exploiting since they are nothing more than a promotional firm. Even Ben Bernanke stated this:
This are his own words (link here).
The will not understand why they are fucked because it is not the system that fucks it. Instead it is who controls is.
And that is why it bears repeating, over and over. Until people learn what is going on and how things work, they will not grasp any of it.
It is why crypto is beyond even those involved in it. They think it is something new. It isnt. Monetary systems have not changed. Money does, but the system remains the same.
So for those who still want to espouse things like it is 1920 (and even then what they claim isnt accurate), then they will keep getting a reminder of how it is now so.
This is not the message, either overt or implied. The message is stop looking in the direction that means very little. Until the focus is upon that which is causing the damage, no progress is made.
That is why I use a phrase like banking cartel and talk about why the central bank system is not relevant. It is mirrors while the actual activity, undertaken by the commercial and investment banks, is ignored.
This is not the intended message, but your intent is irrelevant.
What matters is how your message is actually interpreted by the people hearing it.
People have basic questions like,
Why would anyone lie in such a stupid way that makes themselves look incompetent on purpose?
Why doesn't he just tell the truth and say, "Nah we're just printing reserves don't worry about it."
Isn't that the politically obvious thing to do? Classic deflection and blaming someone else.
The narrative you're peddling goes something like, "Powell doesn't care if he and the FED look incompetent they just want to trick people into thinking they have power so they can manipulate greater market forces." And even if that's true it's a completely unbelievable narrative that nobody is going to buy no matter how many times it gets repeated.
So again if it were me I'd fall back on things that actually make sense like, I don't know, how derivatives are leveraged to steal wealth from the majority into the banker's pockets. Or maybe the relationship between the federal reserve and the federal government. Topics that can't be so casually dismissed by those who think they know better. Just my two cents: Tactless as always.
You do have a point about believability. It is part of my detest for economists (well most of them), they are lying bastards peddling a bunch of theoretical nonsense that, if it was ever true, hasnt been in decades.
It will try to isolate my message more into specific chunks.