I understand that the government is not literally printing money. But it's creating it somewhere, somehow.
Where and how?
This money has to go from public to private hands.
Which private hands are receiving it? Do they get it "for free"?
The IMF is an extension of that, they lend money to countries, then siphon off that countries assets in return.
Look up the Federal Reserve Act 1913 also.
"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." - Henry Ford
2. The fed makes asset purchases on the open market. Of late, these have been two types of assets: US treasuries, and mortgage backed securities. It pays for these with cash and adds them to the balance sheet, said cash was “printed”. The fed is currently in the process of selling (some of) these assets back onto the market and “destroying” said cash.
All of that is represented as the “M1” money supply. M1 is dwarfed by the M2 supply, which is made up of the M1 supply as well as the money created when banks make loans backed by their own balance sheets.
There really is not a thing called "a dollar". It's better to think of the dollar is a complicated engineered system. "Printing money" frequently means tweaking some subsystem of that system to move liquidity to specific places. That may sound like semantics but those types of money can only be used in specific ways and aren't convertible into each other.
One thing Jeff Snider talks about (who is someone I find to have interesting thoughts on this topic but isn't beginner friendly, and also puts out some low quality content) is that people are focused on the quantitative expansion of money but that over the last 30 years, the potentially more interesting story is the qualitative expansion of money, IE we have invented a huge amount of subtly different new types of "money" all of which have different effects on the system and none of which are easily understandable by the average person. He argues that the central banks no longer really understand this system either, that large banks probably have the best current understanding but that really no one party fully understands it, kind of like how no single person understands every detail of a modern smartphone.
Some of the basic categories here are
1) Understanding the differences between base money and non base money
2) various repo market products and other types of "interbank liabilities"
2a) the various Fed facilities which moderate liquidity in these markets
https://www.newyorkfed.org/markets/desk-operations/central-b...
4) Offshore dollar markets (eurodollar markets) and their dollar repo markets
5) And then QE (which simply means buying the long end of the bond market as opposed to short end which was traditionally just called Open market operations, but also happens in bigger volumes than OMO)
As someone else mentioned, Joseph Wang's book could be a good starting point
Here is a really interesting talk on some of these topics: https://youtu.be/itTpI_-OcPc?t=962
At a crass level, in the USA, my understanding is the main mechanism used is: there is someone at a desk with a terminal at the Fed bank in NYC that can buy and sell treasury bonds for "free" (dollars that vanish or appear as needed, electronically) and they do so day to day to keep the rates within the window established by the FOMC committee. (But there are other ways for the Fed to create and destroy money)
So really, the money is going into the hands of any and every one who borrows money during that general time period, and thus receives a lower interest rate than they would have if the government were not carrying out that policy. Larger debtors benefitting to a greater degree, naturally. If you get a mortgage on a small house, you benefit. If you borrow money to take over a large corporation for your hedge fund, you benefit.
Notice that I said "can". If the banks don't actually lend out any money to people and businesses, then no money is actually created and interest rates won't go down. If you don't think that's possible then read about Japan's lost decade and zombie banks.
"Which private hands are receiving it? Do they get it for free?"
The federal reserve buys directly from its banks (with some exceptions). It doesn't buy Treasury securities from the federal government/Treasury. This is in accordance to federal reserve act (https://www.federalreserve.gov/faqs/money_12851.htm)
The federal reserve will credit the money to its member banks out of thin air/electronically. They don't print physical money.
These banks don't get the money for free. They have to have the Treasury securities to sell to the federal reserve.
Where you can learn about all this? This is a macroeconomics subject matter. In college, it's usually the third econ course that business and econ majors take. Usually the title of the course is "Money and Banking". If you really want to get into the practice of it, then many universities offer a course called "Central Banking"; warning: you have to be really into ECON and this is an advance level course...
You can also try this course on Udemy about central banking. It's probably not as advance as the university level course, but maybe it's good enough - https://www.udemy.com/course/central-banks-and-quantitative-...
When central banks buy bonds, they "create" the money the same way we insert a row into a database table. Buying bonds is equivalent to lending money; and the central bank lends money below any market rate.
https://www.amazon.com/Central-Banking-Sustaining-Financial-...
Depends who’s saying it - if it’s a cryptocurrency “enthusiast” (read: bitcoin bro), it’s probably to disparage all fiat and claim how much better their currency is, while conveniently forgetting to mention that DeFi really means “Deregulated Finance”
Anyone can hold u.s. treasuries but only banks can hold reserves. Banks are highly regulated in how they can spend their money and the assets they need to hold. Hence- stuffing banks full of reserves does not hit the real economy. They can’t spend it.
When the government issues debt they are creating new money. Debt = money. More debt = more money. This is why banks are regulated, they create debt(money).
The inverse here is taxes. Taxes take money OUT of the economy. More taxes = less money.
If you want to know what happens to the money created by large institutions, look at a chart of any major index from 2012 onwards........
1. The annual congressional budget has a massive deficit every year. Our government is currently ~30T in debt.
2. In order to make up the difference between tax revenue and spending, the treasury sells bonds.
3. The country’s central bank AKA federal reserve buys those bonds, crediting the treasury without any “buyer side debit”. This part is confusing and where the printing happens. The fed adds treasury bonds to its balance sheet WITHOUT actually “spending” any money.
4. The treasury receives cash on its balance sheet.
TLDR: The fed expands the money supply to buy treasuries so congress can fund its expenses.
The fed has about ~9T in treasuries and MBS on its balance sheet last I checked.
Disclaimer: I'm not an economist, just an interested third-party.
There is no single book that will explain it, and it changes so any book will likely be quickly out of date by publish date.
The banking system is a fractional reserve system. That means each private bank from the smallest local bank to the top 5 must keep a fraction (percentage) of their managed assets in reserve as treasury bonds. The rest of the money can be loaned out.
The Fed itself is a private corporation, it consists of a Board of Directors (Washington DC), 12 Fed Branches, and the FOMC Committee.
The book, The Creature of Jekyll Island, has many useful references in coming to terms with how this came about albeit very critical, its references appear to be accurate at least in the newer versions.
The Fed, auctions off bonds each day, which to my understanding, the banks are forced to buy and hold for the reserve and other market operations.
Quantitative Easing is nothing more than money printing. Assets are swapped for bonds allowing banks to loan more money out (in the interest of preventing liquidity freezes), and there are REPO and Reverse-REPO operations that allow injecting money by loaning the assets (often loans and other securities), or flat out purchasing them. Like with student loans, they become backed by the government.
For the last decade or so, the assets transacted have primarily been toxic assets that may be valued above their actual value. There is little transparency, they've gone by many names Collateralized Debt Obligations being the most infamous. The banks keep the money, make more money by loaning more money out (with little regard for risk), and then sell it back to the FED.
In short, its counterfeiting and fraud if anyone else does it; but not when this is sanctioned by an arm of the FED.
Ray Dalio has good material on historical debt cycles. It appears that we are likely to be looking at something similar to Zimbabwe, (Weimar Germany was better) and that's coming up in the near future.
You have to get pretty deep into Economics coursework to correctly calculate and even economists often get this wrong because there is no accounting for fraud in the existing system. Junk in, Junk out.
Its worsened by the lack of credibility, and the fact that the measures for calculating important metrics such as CPI, Jobs Reports, Unemployment, etc, have been systematically changed so the metrics are under-reporting. This is not new, it has happened over the last 40 years like climate change; no one important paid attention. The metrics now follow more inaccurate methodology and that appears to be driven largely to reduce Cost of Living Adjustments (for Social Security), thereby reducing discretionary spending from people with fixed income.
Its known that those at the top of the system generally get the most benefit from the money created by the system than those at the bottom.
So the question I imagine you are actually wondering (because this is an XY question), is how this all works when you have to factor in the fact that people default on debts and there is bankruptcy protection.
Where does that debt go when it becomes un-collectable.
If its an individual they had to show collateral to get the loan in the first place, and they lose that collateral. Any excess (unsecured) amount is a liability to the lender. Anything not collected or paid that's written off comes at the expense of the lender.
If its a large bank, you have the frauds like the too-big-to-fail, or more appropriately, so big it will certainly fail. These get bailed out with public funds (which are printed) and may even be zombified (Freddie Mac) so they can work around legislation preventing the Fed from buying direct assets.
In other words, every single extra dollar printed devalues all other dollars in circulation which are held by everyone.
This is often seen in the form of inflation. The money you held is worth less tomorrow than it was today. Normally there is a target of 2% inflation per year which mimicked gold being mined, but as anyone is aware over the past 20 years we haven't hit that target, its been much higher, while wages largely haven't risen to match.
Because there is often a lag between when we find out about the printing, and the amounts, everyone holding US dollars and treasury bonds end up being bag holders.
This can continue for decades, until you reach a certain point and a currency crisis ensues. This historically has happened around the 300:1 paper to actual asset ratio, or leverage ratio.
Also, as a side note, many of the trend relationships we've seen historically have inverted, likely in large part due to undisclosed bad actors. For example, a few years ago China had a large amount of gold found to be gold plated copper after audits. The gold backed huge loans which then defaulted. The money that was paid out didn't disappear out of existence, and because it represented a systemic risk I believe (I'd have to double check on that) that they were bailed out.
Similar issues have occurred in the past with railroads where failing railroads were cannibalized by their banks with the intent of being bailed out.
As far as I'm aware none of the banks involved in the Penn Central bailout received much in terms of punishment for their bad behavior and did receive bailouts. They didn't have to disclose financials due to exemptions for regulated industries, and they were failing, the funding banks board members gained control of the Railroad board (same people), lent vast sums to pay out dividends, and then filed for bankruptcy and got bailed out.
The COMEX for many assets only deals in paper (called Warrants) unless you work with a broker that has a loadout policy, and the market for Silver has been artificially manipulated for decades (by JPM) up until the DOJ let them off the hook with a slap on the wrist. They moved to the UK and are doing it all over again but I digress. Paper to Physical in Gold/Silver are roughly 200-300:1 physical oz.
Fun fact, the COMEX is a private institution that has never been independently audited.
There's similar issues going on with synthetic stock market shares and dark pools that have gone unaddressed.
It should also be noted, that Quantitative Easing is only a small piece of the overall fiscal deficit and liabilities.
For private individuals to do these things, its called fraud and is a form of a Ponzi scheme. These systems could be made simple, but instead they favor complexity because the added complexity limits those who can benefit.
So a mortgage is the creation of a financial asset on the books of the bank called a 'mortgage', secured against a house, against which it creates an 'advance' - the liabilities you use to buy the actual house the mortgage is secured against. The result is the bank's balance sheet expands and that's what 'printing' or better named 'creating money' is.
The 'advance' then just keeps swapping hands in the private sector, and that's what we call 'money'. That keeps happening until somebody uses some of it to pay back a loan at which point that portion of the 'money' disappears. The bank's balance sheet shrinks and that is 'destroying money'
The government is no different. When it spends, then by default the central bank provides an overdraft loan to the Treasury department, secured on the government's ability to tax, and creates an 'advance' that it uses to pay people. The central bank's balance sheet expands and money is 'printed'
When government receives taxes that reduces the overdraft loan and the central bank's balance sheet shrinks, and money is 'destroyed'.
In a sensible world that is where it would stop. However some people don't like the idea that government spends by borrowing from the bank it usually owns, or at the very least controls, (even though that is the cheapest place government could borrow from since anything it paid in interest would come back to it as the central bank dividend) so they try to hide the fact or stop it from happening.
Usually they introduce a rule that says government can't have an overdraft. However that is normally only a rule that government can't have an overdraft overnight, so the above still applies during the day whichever currency area happen to be operating in. It would be difficult to run an efficient bank clearing system otherwise.
At which point the Treasury issues a different sort of money called a 'bond' which 'primary brokers' then take as collateral to a bank. The bank temporarily buys the bonds by creating an advance against them. That advance is transferred to the Treasury department who uses it to clear the overdraft.
The primary broker then sells the bond into the wider market and receives money in exchange which it uses to buy back the bonds from the bank so it can transfer the bonds onto the end purchaser.
QE is just the central bank buying bonds permanently using the same mechanism that the primary broker's bank used to buy bonds temporarily - issuing an advance against the bonds which then 'creates money'.
In reality it is nothing more than an asset swap. Whoever had the bond as savings ends up with a newly created bank deposit as savings instead - at a lower and variable interest rate. QE is a way of changing the type of savings held in aggregate, not a way of 'issuing money' as some people still think.
QT is the opposite. The central bank sells back the bonds it owns to the market and the end purchaser ends up with a bond, not a bank deposit. The bank deposit is destroyed.
The overdraft the Treasury uses can be disguised in another way. The bond issuing and QE mechanisms above are used in tandem until the Treasury account reaches a particular positive balance. That trick is used by the TGA in the USA and the DMA in the UK to try and make it look like the government is never borrowing - even intraday. It is just a facade. Operationally it makes no difference. The central bank will never bounce a government payment instruction.
I've simplified the above as much as I can, but it is still quite involved. I hope you can follow it.
In modern economies money is created in many places.
The most discussed means is through loans to banks from the central bank ("the Fed"). This money is lent to the banks at the current federal interest rate and is "free" in the immediate term but "unfree" in the long term as they must pay interest. Roughly speaking, if you can convince a bank that, should you borrow that money you will certainly generate more, and return it at a faster rate than the bank has to pay, then they will seek to lend you money. For most individuals, this is housing debt (a mortgage) and personal consumer credit (credit cards, car payments, other forms of purchasing in installments, etc.). Companies have access to roughly equivalent and often larger and more attractive forms of credit such as business loans, equipment financing, and so on. Printed money is such a small portion of the economy that it is statistically mostly irrelevant. Other acts of government can also create money by generating government debt and obligations.
However, that is not the whole story. Separately to the banking sector, a whole lot of money is "created" when people ascribe value to things. For example in venture capital, if I were to create a company purely with hard work and loose change and you were to buy in to it because it's the next greatest thing and is clearly going places, let's say you buy 1% for $1M at a pre-money valuation of $100M then you've sort of voted in to existence $99M of the $100M that you didn't buy by saying that valuation has enough legitimacy for you to put down $1M. While that value is not liquid, and is not really "money" per-se until it becomes so, it's been "created" just the same. If I create shares on public markets, art, or iconic architecture, or an NFT, it is the same process. Ultimately the value of these things is curtailed by the market's willingness to purchase them, which is often not directed purely by demand for the supply but by other concerns (irrationality such as FOMO or fads, money laundering, fear of regulators, devaluation of currencies, otherwise illiquid capital, etc.).
In Switzerland they have WIR, an interesting mutual credit clearing association for companies which allows them to purchase from one another without immediate settlement, on the understanding that they will settle in time. Such mechanisms are also effectively creating liquidity (==money) by agreeing to hold debt on their books. It doesn't come from nowhere, but it's still created and created outside of banks. https://base.socioeco.org/docs/wir_and_the_swiss_national_ec...
To a lesser extent all businesses do this with any difference between values ascribed and paid, goods received and payments scheduled, services rendered and payments received. Paraphrasing George Soros: Classical economics is based on a false analogy with Newtonian physics. It's actually a whole lot more irrational, complicated, interesting, and exploitable. Always remember: Trust is the availability of effective recourse. - Dan Geer (2014)
Quotes via https://github.com/globalcitizen/taoup