[bubbleRefuge]

A few myths are circulating here. Let me declare 1)Printing money does not cause inflation. 2)We do not have a fractional reserve banking system, banks can and do create money out of thin air as suggested(aka loans). 3) Bank Runs are not a problem.

The price level/inflation level in macro econ is the intersection of supply and demand. So called demand-pull/cost-push inflation. Sure, you can say that printing money causes inflation ceteris paribus. But in the real world things are not ceteris peribus. You can create money and have deflation if supply/production increases at a greater rate that money creation causes increases in demand. If money creation results in balances held in deposit but not spent, then there is no inflation as a result of the money creation itself. This probably explains why the US economy has been teetering on deflation: most of the money created ends up hoarded in the accounts or rich people who do not spend it.

There are two kinds of money: bank deposits and reserves. Reserves( aka hi powered money/vertical money) are physical currency in circulation or in bank vaults and special deposit accounts at the Fed held by banks that are members of the federal reserve system. Bank deposits ("private money" or vertical money) are created by banks when they create loans. The lending process is regulated by the Fed and government agencies( ex. office of the comptroller of the currency). Yes, the Fed imposes reserve requirements on member banks. But these requirements do not constrain their ability to lend. The reason is b/c banks can make loans and borrow reserves from the federal funds market or the Fed directly in the following accounting period. Reserves are used for interbank deposit settlement. So when a check is written from account holder A in bank A to AH B in bank B, the transaction is settled at the reserve level using reserve accounts at the Fed. It is complex and I could go into capital requirements, which are a true constraint on money creation by banks.

Because of FDIC insurance, bank runs are not a problem in our system. Ultimately the Fed can back stop the FDIC as it kind of did during the crisis of 08.