Friday, September 13, 2013

Answer for Macroman

macroman, I’m with you up to here:
“It is these reserves that the banks can then use to lend out money or do with it whatever they please.”
1. If you’re talking about banks lending reserves to each other (which I’m pretty sure you’re not) then this is correct. Since reserves are defined as base money HELD BY THE BANKS, you can see how this is true. Yes banks loan each other base money:
“MB: The total of all physical currency plus Federal Reserve Deposits (special deposits that only banks can have at the Fed). MB = Coins + US Notes + Federal Reserve Notes + Federal Reserve Deposits.”
2. If you’re talking about something else, this is not true. About the closest thing you could say that IS true is that a cash advance is a loan of base money in the form of “physical currency.”
“Because the federal reserve does not have to have the MONEY on hand to buy the bond, but rather can use a made-up reserve, it is the equivalent of printing money.”
Check this out:
Notice how reserves flow out of the Fed, and assets flow in, in equal proportion.
As for the rest of your email, check this out:
Especially the balance sheets at the bottom: “Public (simplified)” and “more simpflified.” Especially this bit:
public’s stock of money = L + B + F = bank deposits + cash
It’s the “F” part you’re worried about. But the thing to keep in mind though is that this does NOT affect the public’s equity!
public’s equity = T
QE changes the composition of the public’s stock of money, but has NO effect on the public’s equity.

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