The Federal Reserve’s quantitative easing programs, QE for short, is not inflationary, said Chairman Bernanke to Jacksonville University students on November 5th, 2 days after Bernanke and company launched QE II. These asset purchase programs, he said, are not inflating the money supply.
Not so says THE CONTRARIAN TAKE to those same students. Says THE CONTRARIAN TAKE to Chairman Bernanke, it may be time for Money Mechanics 101, for it appears you do not understand the money creation process. If you did we don’t think you would have said this:
What the purchases do… is… if you think of the Fed’s balance sheet, when we buy securities, on the asset side of the balance sheet, we get the Treasury securities, or in the previous episode, mortgage-backed securities. On the liability side of the balance sheet, to balance that, we create reserves in the banking system. Now, what these reserves are is essentially deposits that commercial banks hold with the Fed, so sometimes you hear the Fed is printing money, that’s not really happening, the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed…