I just posted this link to my MBA Facebook page ... because Dick is right, and I love to tweak my Keynesian classmates. (I am pretty hardcore Hayek).
If you want to actually learn how the Fed “creates” money, Dick’s explanation is a pretty good synopsis for the lay person. No, his explanation is not perfect, but at least he understands the mechanics of it. And no, the Fed does not print money, rather it lends money with the intent that once the banks get it they too will lend it. This is not bills that are printed, it is data in a database ... or more accurately journal entries on a ledger. The general rule of thumb that the Keynesians work on is that every $1 the Fed lends to a bank, based on reserve requirements, translates into $20 of new “money” that the banks can lend to you and me.
By the way, QE was not invented in the last few years ... if you remember the Goliath that was the Japanese economy back in the 80’s, you might wonder what happened to it? Well, they had a crisis and responded with QE ... I don’t know what number of rounds of QE they are up to now ... I think it is in the mid-20’s, but regardless, they are living proof that QE does not work. The Japanese economy has been basically stagnant for 30 years because of QE. If you ever heard of Abe-nomics, that was just a new version of QE.
For those who complain about the Fed mucking with monetary policy ... um, that is their job. The Fed has a dual mandate. The mandate is to maximize employment and create stable prices through monetary policy. If either one of those is starts to change too fast, the Fed takes action by changing monetary policy, either by expanding (lending) or contracting (buying back) bonds. That’s all they can do.
What would change the game for the Fed considerably, is if we were to convert back to a hard currency such as Gold. If we did that, then the only way for the Fed to increase the money supply would be to either A) acquire more Gold or B) devalue the currency already in the market so that each dollar is worth less Gold. In short, converting to a hard currency pretty much makes it impossible for the Fed to achieve their dual mandate, which is why trying to convert us back to the Gold standard is great political theatre, but has virtually no chance of actually happening. At present, the US has roughly 260,272,000 ounces of Gold in its reserves. The US currently has $1.36 Trillion in circulation. Doing the math, Gold would have to be at over $5,225/oz to support our currency. Since Gold is currently at roughly $1,200/oz ... our currency would have to be devalued by around 77% to achieve equilibrium. In short ... we are talking revolution if someone tried to do that boys and girls ... cause that aint happenin.
The Fed isn't lending money to the banks. They haven't done that in years and years.
Right now the banks are lending money to the Fed. Currently, $2.4 trillion in excess reserves.