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Money and the Fed


The Fed does not create money, it creates credit.


They've gone PLAID!

Ticks reached a phenomenal +1600 yesterday late in the day. That is past ludicrous where everyone is taking stocks on the offer at the same time. This either means that the fundamentals of each company is vastly improving all at the same time or someone thinks so. Usually if someone thinks this it is a short covering, eliminating pain.

As oil and gold drop, signaling the consumer may be out of money and the Fed can't create anymore, much fuel for the market is being used as shorts scramble to cover and mutual fund managers bring their cash from meager to non-existent. The shorts are eliminating current pain while fund managers are trying to eliminate future pain.

But I use the term "money" incorrectly. Money is a tool of exchange. Ever since society has been able to produce more than it can consume we have had the need for money. Money is not bad.

The Fed does not create money, it creates credit. The way the Fed creates credit is by buying bonds from dealers either through repos (temporary purchases) or coupon passes (permanent purchases). The Fed calls up J.P. Morgan in the morning and agrees to buy some of the bonds it has in inventory. The Fed does not buy these bonds with anything but its "credit." J.P. Morgan's account is credited and the Fed's account is debited. The Fed's balance sheet as a consequence gets larger: the bonds go on the asset side and the debt goes on the liabilities side. There is no new "money," there is new credit in the system that acts like money. J.P. Morgan does not have to take this new credit if they feel they cannot lend it out. Of course they will always take it for a price, but that price might drive the dollar lower if it is steep. The only way the Fed can force credit into the system is through monetization where it actually goes into the market and buys assets like stocks and bonds.

Money is naturally created in an economy through income...the more a society can produce over consumption the more income it generates. When a society consumes more than it produces the more it needs credit to fill the void. This is the nature of our trade deficits.

And that is the main concern many of us have with the U.S. economy. Real income and money is being replaced by capital gains and credit.

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