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Why does this myth persist that the Federal Reserve "prints money out of thin air", or more realistically "creates money out of thin air"? People are NEVER going to understand what's really going on if the Fed is continuously and erroneously portrayed as the boogieman, and the real culprits are ignored.Sure, the Fed prints money (actually the US Bureau of Engraving prints the money and the Fed buys it from them for the cost of the printing). It does so when one of its member banks needs currency. When the Fed ships that currency to the member bank the Fed debits that bank's account dollar-for-dollar. No new money gets created when the Fed "prints" currency.
As background, a lot of gold standard proponents suggest that gold should be the collateral behind a dollar, and claim that there is no collateral behind a Federal Reserve note. That's simply not true -- every dollar issued by the Federal Reserve is collateralized by US Treasury securities.
So where does the Fed get these US Treasury securities that they use for collateral? They buy them, of course, from the US Treasury, and when they do so they credit the Treasury's checking account. So the Fed now has a piece of paper (actually an electronic accounting entry) from the US Treasury worth, say $1000, and the US Treasury now has dollars in it's checking account, which it can inject into the economy as a Social Security benefit or a payment to Halliburton.
THAT'S where the money is created. If the US Treasury never issued any more securities, or more precisely, if they never issued any more than they retired, the Fed would only have a fixed supply of a commodity called US Treasury Securities with which to collateralize and manage the money supply. It would, in fact, then have to manage the money supply like it would for any finite commodity system.
What DOES get printed out of thin air are US Treasury securities. When the government doesn't take in enough tax revenues to cover its expenditures, it has to borrow. When it borrows it doesn't go into a bank and fill out a loan application, it does so by just printing up a bunch more Treasury securities. Treasury securities then get sold at a discount – depending on the prevailing interest rate, a 1-year $1000 Treasury note might get sold for $960 with the promise to pay the full value when it matures. The buyer makes money by buying at $960 and redeeming at $1000, effectively about a 4.17% annual interest rate.
They get sold to the Fed, to private investors, to China, and Saudi Arabia. The Fed only buys what it needs to implement its targeted policies.
Regardless who buys them to -- Fed, China, or whoever -- the US Treasury then injects that money into the economy. That's where the new money comes from.
The national debt now is about $9 TRILLION dollars, up dramatically since Bush Sr took over from Reagan. It rose, but more slowly, under Clinton, and has had it's greatest growth while Bush Jr has been in charge.
In any case, the Fed holds less than 10% of the debt as Treasury securities to collateralize and manage the money supply. Most new money has been injected into the economy from the 90% that the Fed doesn't control.
Feel free to criticize the Fed's mission, which is nominally to promote maximum employment, stable prices, and moderate interest rates. Criticize their ability to do that with the tools they have at hand. Argue that things could be done better. Argue that SOME of the problems are the Fed's monetary policies.
But, please, don't tell me that they create money out of thin air.
The creation point is the US Treasury.
It's the US Federal Government's fiscal irresponsibility that's causing this economic tsunami, not the Fed's monetary policy. The government simply spends way more than they have. It’s that 90% of the nation’s debt that the Fed doesn’t control, that contributes to the lion’s share of the problem.
