Thursday, December 9, 2010

Jon Stewart: The Fed Isn't Printing Money, It's Imagineering Money (Daily Show Clip), Morgan Stanley Explanation (BASE, M2, MZM)

After Fed Chairman Ben Bernanke told 60 Minutes on Sunday (12/5/2010) that the Fed wasn't printing money, Jon Stewart of The Daily Show wondered why Bernanke told 60 Minutes 21 months ago that the Federal Reserve was effectively printing money to lend to banks. Stewart described QE2 as "imagineering" money ha. It is confusing. David Greenlaw, Managing Director and Chief U.S. Fixed Income Economist at Morgan Stanley, explained how the Fed wasn't printing money. I added links to charts at the St. Louis Fed. From PragCap.com:
"In the US, the Fed pays for bond purchases by crediting the reserve account of the bank that sold it the securities. Assuming that the rest of the Fed's balance sheet doesn't change, this leads to an increase in bank reserves. So, the monetary base - which consists of currency plus bank reserves - goes up by the amount of the open market purchase. In every textbook written prior to 2009 that we have come across, the rise in the monetary base is assumed to be transmitted into a roughly equivalent rise in the money supply (M2, MZM). But, as we now know, this assumption is not always valid. In the first round of Fed balance sheet expansion, which began in late 2008 and continued into 2009, the monetary base more than doubled and the money supply barely budged. In textbook terminology, the so-called money multiplier - the ratio of the money supply to the monetary base - declined by about the amount that the monetary base rose. The Fed can create excess reserves, but it can't force the banks to turn these funds into loans or securities holdings. In this case, the excess reserves are being stockpiled in banks' cash accounts. " (read more at PragCap, Morgan Stanley)

Also of note, apparently U.S Dollars are committing suicide on the printing press. Watch The Daily Show video from 12/8/2010 after the jump.


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