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Quantitative Easing?

 
 
Reply Wed 7 Feb, 2018 02:14 pm
Why do people say the federal reserve bank prints money out of thin air when it gives money to banks in exchange for securities?

Is this more a figure of speech in that the money they dump into the banks is money that is suddenly added to the general money supply so it has for all intent and purposes 'appeared out of thin air'. In reality did the fed own this money before handing it over to the banks in exchange for securities i.e bonds?

I have always assumed they literally just create money whenever they want and inject it into the banking system. I'm not so sure this is the case now after an article i read.

I haven't been able to find a clear answer to this online. There is one side who thinks the money comes out of thin air and another which suggests it doesn't. Which is it?
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maxdancona
 
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Reply Wed 7 Feb, 2018 06:40 pm
@BullRider,
This seems to be a good explaination.

https://en.wikipedia.org/wiki/Money_creation

Basically when the bank loans out money... they are creating money. If you put $5,000 in the bank that is still your $5,000 (you can take it out and spend it anytime you want). But the lends out a portion of it, let's say $2,000, to someone else who can also spend it. So the $5,000 of purchasing power has become $7,000. And, money is created.

(It is helpful to understand that money is the ability to buy something... it doesn't have to be green rectangles).
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maxdancona
 
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Reply Wed 7 Feb, 2018 06:43 pm
@BullRider,
The people who use the term "out of thin air" usually have a political agenda to change the current economic system. They are kind of correct... but they don't have a better way to do things.

The fact is that our current economic system works very well... it gives us a way to store value for the work we do as well as a system of credit for businesses to grow and people to buy houses and cars.
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