How Does the Fed “Print Money?”
With the Fed’s announcement today, many people may be wondering “How does the Fed print money?” Here is a snippet from my Daily Piece on Currencies.
Most of the time when we say that a central bank “prints money” that does not mean that they actually fire up the electronic version of a printing press. They can and this is the way Bernanke described it in 2002 when he said that “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
However more often printing money means that the Federal Reserve will hold an auction to buy assets like bonds or mortgage backed securities from banks. Then they issue a credit to the bank’s account, creating new money and the hope is that the bank will use the money to lend to businesses and consumers.
Unfortunately by increasing the supply of dollars, each dollar is worth less. The U.S. government also increases its debt burden, raising concerns for foreign investors. This is compounded by the fact that the Fed’s purchases of Treasuries will drive down bond yields, reducing the attractive of dollar denominated investments.