[sgt101]

The funny money goes on the central bank balance sheet and not onto the national debt. Therefore the national debt interest cost remains constant, therefore taxation isn't pushed up. In addition government is not well placed to make the investment decisions required; the hope was/is that bank lending would effectively make these decisions by keeping businesses open and facilitating new projects organically.

[RobertoG]

If the FED is a USA government institution and new money was created by that institution:

why the money doesn't add to the national debt and doesn't change its cost?

[JumpCrisscross]

> If the FED is a USA government institution and new money was created by that institution

The Federal Reserve is a quasi public-private institution. It has a separate balance sheet from the U.S. government. Central bank liabilities are money--a dollar bill is a Federal Reserve Note and a dollar in a bank's reserve account is wirable cash.

National debt is debt accrued by politicians to pay for goods and services. Adding the money supply to the national debt would produce a meaningless number, so we don't do it.

[salawat]

Wait, then what is the debt measured in?

I get the difference between "money" and value, but if you magic money into existence, you've caused inflation of your currency, increasing the amount of currency it would take to add up to the pre-magic "value" of your national debt number as measured in dollars. Therefore increasing it by definition.

Just saying it's meaningless sounds a bit disingenuous unless I'm missing something.

I smell a rat.

[pembrook]

It's counterintuitive, but inflation is a good thing. It incentivizes people to invest their money into the economy in businesses and government projects (bonds) instead of hoarding away their money in a bank account.

Unfortunately how our economy works is a highly complex topic, so for most people the gut reaction is "hrmmm, that doesn't make sense at first glance to me, so it must be wrong." Thankfully, average Joe American doesn't even know the Federal Reserve exists, so the FED is able to operate with a level of sanity found no where else in government.

The fact is, the FED is one of the only institutions we have that actually works because it is largely managed by subject-matter academics and not politicians, most of whom are lawyers/pastors/TV stars and war heroes...a group generally dificient in their understanding of modern economic theory.

Do central banks make mistakes? Of course. Japan is a great example. But a quick look at history shows the world is better off with them than without.

[rsync]

"It's counterintuitive, but inflation is a good thing."

Inflation is neither bad nor good - it has costs and it has benefits and we as a democratic society need to decide where we would like to (attempt to) set that dial.

"Thankfully, average Joe American doesn't even know the Federal Reserve exists, so the FED is able to operate ..."

The degree to which average citizens are unaware of the fed is the degree to which it can behave outside of the bounds of our democracy - and that is negative.

Further, their ignorance which you so deride does not keep them from noticing when they are getting screwed. A great many elderly folks on fixed incomes and inflation adjusted COLAs have felt just that way for a decade.

[salawat]

The thing that bugs me is the idea that money is best handed to someone else to do something with.

The more one blindly invests with only seeking ROI with actors maximizing around the same metric is how you generate business landscapes that would seem incredibly hostile to competition if run to their logical conclusion.

[AnimalMuppet]

> but if you magic money into existence, you've caused inflation of your currency

No, you've increased the amount of money. That's not the same as inflation.

Let's say I've got an economy with $1000 in it. That means that my GDP adds up to $1000, by definition. (I'm ignoring velocity here.) $1 has a certain value. Now Intel turns on a new manufacturing facility, and we have an economy just like it was, except it contains a lot more state-of-the-art chips. If we stay with $1000, then each dollar is worth 1/1000 of the economy, and since the economy now contains more stuff, the value of each dollar grew. To maintain the value of each dollar at a stable amount, we need to grow the total number of dollars as the economy grows.

2008 was different. In 2008, $4 Trillion had just evaporated. The Fed injected $4 Trillion into the economy to try to stabilize things. It more or less worked.

[Firadeoclus]

> That means that my GDP adds up to $1000, by definition. (I'm ignoring velocity here.)

That's not the definition of GDP.

[AnimalMuppet]

I know. I was, essentially, assuming velocity = 1 for simplicity, because velocity was tangential to the point I was trying to make.

[pram]

Private banks also create money, not just the Federal Reserve. Look up fractional reserve banking. The system is implicitly inflationary.

[salawat]

That doesn't really detract from my point though, and there seem to be some critics of fractional reserve banking that seem to home in on the exact point I'm calling out.

Every time a currency "inflates" any values measured in that currency by definition change.

Or is that what's meant by it's meaningless, since the value is now basically what it was plus the fraction by which the money supply just grew? I.e. V=value final v=initial value F=fraction of money supply ex nihilo'd V=v+(v(1÷(F)))

Edit: I think I got that right...

[RobertoG]

>>"Adding the money supply to the national debt would produce a meaningless number, so we don't do it."

If the money created by the FED is just a meaningless number , why don't they finance the government directly and the USA would avoid to pay bond interests?

[JumpCrisscross]

> If the money created by the FED is just a meaningless number

Money supply is not a meaningless number. The sum of money supply and the national debt is a meaningless number.

It would be like taking my checking account balance and adding it to the amount of cash JPMorgan Chase has on its balance sheet. Independently, they're meaningful figures. And one is related to the other. But the sum doesn't do anything useful.

> why don't they finance the government directly and the USA would avoid to pay bond interests?

This is called running the printing presses. Wherever it has been tried, historically, rampant inflation follows. The independence of the Fed is to ensure rate-making (and money supply) decisions, which have broader economic implications than the U.S. government's interest costs, are made apolitically. (That said, the Federal Reserve is the largest buyer of U.S. Treasuries and remits its profits to the Treasury.)

[RobertoG]

>>"This is called running the printing presses. Wherever it has been tried, historically, rampant inflation follows."

My understanding is that most of the cases of hyperinflation (Germany Weimar Republic, Zimbabwe..) were due to problems in the real economy, not to the printing of new money.

Anyway, it seems that, related to inflation, the important thing is the money that is spend in the economy in the current period, not the public debt (the money that has already been spent).

A big public debt doesn't mean inflation, as the case of Japan (or the USA) show. Public debt an inflation are two very uncorrelated variables.

[cconroy]

@JumpCrisscross how independent are they really? The fact that they will not entertain a thorough audit is in itself instructive. Perhaps central banking is too "centralized" and susceptible to corruption even in a well-run system like the Fed (the fact that the dollar is the reserve currency and they fight inflation ruthlessly too the detriment of employment). Perhaps a p2p software system could help ;)

[JumpCrisscross]

> they will not entertain a thorough audit

The Fed is audited by the GAO, the OIG, outside auditors, and its Board [1]. Its balance sheet is published weekly and closely scrutinized by the investing public as well as every bank.

> they fight inflation ruthlessly too the detriment of employment

The Fed has a dual mandate. Its post-crisis journey has been one of trying to stoke inflation.

[1] https://www.federalreserve.gov/faqs/about_12784.htm

[cconroy]

You're right when I used the word I was referring to "Audit the Fed" slogan à la Bernie Sanders & Ron Paul. The bill in question that was striked down is here [0].

The bill's purpose

> ...If enacted, the bill would also have ensured that the

> audit results would be available to Congress. The audit

> would include the Fed's "discount window", its funding

> facilities, its open market operations, and its agreements with foreign bankers. [1]

[0] https://en.wikipedia.org/wiki/Federal_Reserve_Transparency_A...

[1] https://en.wikipedia.org/wiki/Federal_Reserve_Transparency_A...

[dragonwriter]

> Its post-crisis journey has been one of trying to stoke inflation.

Well, “avoid deflation” would probably be more strictly accurate.