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Comment by wcoenen | Hacker News Reader

> We've injected trillions of dollars of fiat into the economy this year

When the government issues debt and then uses the money to send out cheques, that money had to come from investors in the first place. So the money was reallocated, not created. (New assets did get created: someone is going to hold those bonds and count them as part of their assets. But they can't use these bonds directly to buy groceries.)

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But recently, the U.S. Treasury has issued a ton of debt to the Federal Reserve. The Fed is creating dollars and handing them to the Treasury in exchange for T-notes. The recent debt increase has actually created U.S. Dollars out of thin air. Following this line of thought, those dollars have made their way into the "real" economy in the form of PPP loans and Covid checks. It was a similar story in 2008, but the amount of federal debt held by the Fed has exploded this year [1].

Furthermore, the last time the Fed has tried to draw down its balance sheet of federal debt, commodity prices went crazy and Jerome Powell had to abandon that quantitative tightening program. So, it's not even like the Fed can easily move those T-notes to the private sector and pull USD out of circulation -- we're stuck in an inflationary period.

[1] https://fred.stlouisfed.org/series/FDHBFRBN

The fed creates bank reserves, which is different from the commercial bank money in your account. It's quite confusing because both are called "dollars", but they can't be used in the same way.

That’s not true when the buyers of the debt include the Federal Reserve using new money, as is happening here.

I think quantiative easing added trillions of dollars during covid.

https://en.wikipedia.org/wiki/Quantitative_easing

When the government issues bonds, they sell them for commercial bank money, the same type of money in your bank account.

When the central bank later buys those bonds from banks (they never buy them directly), something different happens: the bonds are exchanged for "bank reserves", a different type of digital money that only exists as numbers in the central bank's database. This "money" cannot be used to buy groceries.

> A central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply.

Quantitative easing increases the money supply. They've injected trillions. Who got it is a separate question.

Quantitative easing only increases "bank reserves" in the accounts at the fed, not the money supply. The accounts at the fed are an isolated system. To increase the money supply, commercial banks need to create money via loans.

The reserve requirement is 0%, increasing a bank's reserves doesn't allow them to lend more. There are mechanisms that allow an increase in bank reserves to be spent in the economy without loans [0].

[0] https://positivemoney.org/how-money-works/advanced/how-quant...

I read the post you linked, and was surprised by the description of money being created when a UK bank buys a government bond from a pension fund. I thought commercial banks were only allowed to create money when creating loan assets. Is creation of money when banks buy assets a unique feature of the UK banking system, or does it also happen elsewhere?

If banks would buy financial assets and create money in the process as described in the post, then that would certainly be inflationary. (e.g. I can imagine hypothetical legislation that forces banks to buy government bonds, that would be the time to run for inflation protection.) As far as I understand, this has not happened, or at least not to the degree that it caused inflation. The effect of QE has been to increase bank reserves but not the money supply, which is why we haven't seen inflation since the financial crisis.

The purpose of QE is to cause inflation, the federal reserve is explicitly trying to avoid a Japan situation where there are low interest rates and deflation [0]. To avoid a deflationary spiral [1].

I can't find a source that explains the mechanism for how QE affects the economy.

[0] https://www.investopedia.com/articles/investing/051315/what-... [1] https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral

Let's inject quadrillions, then!

The limitation is that the bonds need to be payed back with income from taxes.

In reality bonds are rolled over so not really.

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