The Fed creates money, which nothing else can do. Of course the money supply has its own ebb and flow from private banks and such offering loans, but it's hard to ignore M2 doubling every 10 years.

I agree with your sentiment but this isn’t true, in fact for most of the Fed’s life it was not the primary creator of money.

Fractional reserve banking (which, by definition, the Fed is) creates money. If I deposit $1,000 into my local bank, and they turn around and lend $900 of that back out, that creates money.

> If I deposit $1,000 into my local bank, and they turn around and lend $900 of that back out, that creates money.

While you are right about fractional reserve creating money, this example is a common misconception. When you deposit $1000, the bank assumes a reserve of $1000 and lends out $9000. This, is assuming the bank has enough reserves on hand. And reserves for the bank is either central bank money (given by fed) or treasury bonds (bought from your $1000 deposit) or MBS (bought from your deposit).

I’m not sure you understand how this works. It’s not a common misconception, it’s literally FRB.

The bank might turn around and borrow from the Fed and use the deposits as reserves, but that has more to do with rates markets and nothing to do with FRB.

This video series might help more: https://www.youtube.com/watch?v=KvpbQlQwl0A

  > If I deposit $1,000 into my local bank, and they turn around and lend $900 of that back out, that creates money

im kind of ignorant so please forgive if this is not correct, but i've heard its not necessarily "creating" money since its (the 900 dollars) all on the balance sheets as liabilities?

While it is not technically "creating" new money it is expanding the supply of money (credit) in the economy. In the above example you still have $1000 owed to you and the company/person receiving that loan now has $900. That's a total of $1900 of "real" money generated from your $1000 deposit. The balance sheets net out to zero but there is in effect an extra $900 now in the economy.

You’re splitting hairs that can’t be split. Increasing the money supply is creating new money.

Money is created and destroyed all the time.

Money supply is not a fixed constant, it never has been.

But under your argument, then the Fed doesn’t technically create money either. It lends money like any other bank. Now this money is created out of thin air, but in theory it’s eventually repaid.

A bank isn't creating money in the same way the Fed does. Yes they can increase the "money supply," which for whatever academic reason doesn't include the liabilities, but not the money in circulation. And they can only physically lend out the amount that's deposited, or legally more like 90%, and they're hosed if everyone wants their money back.

Only the Fed can create money out of nowhere. They can create endless dollars and owe nothing, diluting the currency permanently. Inflation and other metrics keep them in check. The common sense is actually right, not the overly technical explanation of lending that somehow concludes that the Fed isn't special.

> in theory it’s eventually repaid

It doesn't have to be, and it hasn't been. M2 has generally just gone up.

The money supply has been steadily but quickly increasing for decades now. That can't be a result of fractional reserve banking alone. When I say the Fed creates money, I'm referring to the virtual printing.

The supply of money has been increasing since the invention of money. Humankind would be incredibly resource constrained otherwise.

Money used to just be precious metal or correspond to it, so no this isn't how it's been from the start.

Why resource-constrained? It's money, not something with utility. In any expanding economy, you generally get more buying power spending later rather than now, regardless of changes in money supply. Only if the currency is being diluted too much, you have to park your savings in something scarce instead, like land or low-risk stocks. It's not all that different from just using a fixed supply of currency (I'm not counting lending as creating money; it's not the same thing).

I've only been alive since the 70s. What was life like before the Fed created money? Was it better?

Life was different for unrelated reasons. Fed money creation is effectively a tax on anyone holding dollars. Unfair as it is, it's not life-altering.

Yep, we print 40% of all known money in the last 2 years, needlessly lock everyone down, and then complain that the rent is too damn high

Poor landlords must be suffering owning houses and all while everyone else is enjoying facing homelessness

This is an insane assertion. The fed has made consistent huge mistakes in monetary policy. No serious investor or public financial figure thinks these cheap rates were necessary

Lots of people who wished the natural interest rate was lower liked to blame the Fed instead of fundamentals. But if the Fed has set the interest rates too low we would have had runway inflation from an overheating economy instead of a low prime age employment % (which suggests the interest rates were too high).

No you don’t get it. Risk assets are priced from interest rates. Low interest rates inflated assets, which caused mass wealth inequality and excess wealth made by owners of capital. The picture is way more complex, we have had deflation due to outsourcing and technology. So it’s been impossible to get inflation.

This is an insane assertion, if only because the Fed is run by public financial figures.

We live in a world that is awash in capital because old people & rich people have a large amount of capital. When the supply of something is high, the price goes down. And the price of capital is interest rates.

The excess liquidity comes from low rates. No serious financial investor thinks otherwise

I had literally never thought of this in any way. I've just finished reading two papers: one which shows that net-investment isn't really correlated to savings or interest rates which exactly supports your position (with data!); and, a second which shows that the ratio of old-to-young people is an incredibly good predictor of interest rates (with data!).

You're both right? I suspect that means there must be a third option.

$6T of QE is about 1/10th the size of the US bond market and 1/20th the size of the US stock market.