How The Fed Prints Money

How does the Fed print money? It doesn’t use a printing press (at least not primarily). It just buys stuff from banks by sending electronic credits to the banks’ accounts.

For example:

Crap Bank owns an asset–for example, a bond.  The Fed buys the bond from Crap Bank for, say, $100,000.  The Fed credits Crap Bank’s account with $100,000.

Voila!  The Fed has “printed” $100,000.  That’s right: The money just came out of thin air.

Crap Bank can now lend that $100,000 or use it to buy more assets.  Which the Fed can then buy and print more money, etc.

How much money is the Fed printing these days?  A whole lot of money.  $800 billion, says the WSJ’s Jon Hilsenrath:

The cash credits — known as bank reserves — have grown from $3 billion last August to $776 billion by mid-March. The Fed made clear this week that reserves will soar in the months ahead, as the central bank expands its rescue programs.

Once you understand this, you can see why everyone is scared to death of inflation.  The value of the economy didn’t grow in these transactions.  The value stayed the same (actually, it dropped).  But the money supply grew by $800 billlion, which means that every dollar out there is worth a little bit less (more dollars, fewer assets).

How much paper money has the Fed printed over this period?  Not much.

Since August, Federal Reserve notes — also known as dollars — have only increased to $862 billion from $793 billion.

Jon Hilsenrath has more >

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.