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Comment by dragontamer | Hacker News Reader

There's a big difference in issuing new credit and issuing new dollars.

Printing Money (aka: New US Dollars) means you have no intent on paying the money back or closing the account.

QE was the creation of a credit-line. Just like how a credit-card eventually needs to become $0, the US Fed is winding down QE and reducing its account back to zero.

Reversal of QE is accomplished through the inverse of its actions. Instead of buying bonds, the Fed will sell bonds (causing interest rates to rise WHILE closing out the QE credit). The Fed will NOT receive money (ie: M0) for those bonds, it will instead pay off the QE Credit Card account.

There's a HUGE difference between QE and Printing Money. And this difference (paying it back, which negates the effects of QE over the long term) is why QE is okay.

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I don't see any reason why QE couldn't continue forever? The reason the Fed doesn't buy unlimited amounts of whatever it likes and grow its balance sheet forever is that this isn't consistent with its mission to fight inflation. But as a matter of game mechanics, it could do this. The Fed never has to pay anything back because people are very happy when you pay them for stuff using U.S. dollars.

It could also create as much M0 as it wants by buying it from the U.S. Mint. This is pointless, though, because there's no real difference, and guarding mountains of cash would be more expensive.

We talk about M0 versus M1, but it's not like the U.S. has two different currencies. They are both equally money.

> They are both equally money.

I think its actually "MB" you're talking about, not M1. M0 for coins + physical bills. "MB" would include Federal Reserve deposits. For whatever reason, its different than M1...

They are considered "equally money" because its "Equally trusted". Banks can turn Federal Reserve deposits into Cash, and vice versa. Your savings account, checking account, and so forth is similarly "equally money" because you trust the bank to give you the cash when you need it.

And once again: the Fed can't create M0. So that right there is a major disconnect between M0 and MB / Federal Reserve Deposits.

But Federal Reserve Deposits are not money. Like a savings account, it generates an interest rate. In effect, Federal Reserve Deposits are "like money" because everyone trusts them very much.

If the Federal Reserve plays too many games with its Federal Reserve Deposits, there may become a mismatch in the trust of MB and M0. A dangerous game for sure, so its a good thing that QE has stopped.

> The reason the Fed doesn't buy unlimited amounts of whatever it likes and grow its balance sheet forever is that this isn't consistent with its mission to fight inflation.

Bingo.

Because the Fed as an entity believes inflation should be at a certain level. Not too high, and not too low (aka: negative or deflation).

> The Fed never has to pay anything back because people are very happy when you pay them for stuff using U.S. dollars.

On the contrary. Inflation is precisely when people aren't happy for being paid in US dollars. Things cost 10% more because people trust the dollar 10% less.

If the Fed never pays anything back, inflation will grow (aka: people trust the dollar less and less). The reason why inflationary monetary policy was fine in 2011 through 2014 was because DEFLATION was the main worry.

re: "But Federal Reserve Deposits are not money. Like a savings account, it generates an interest rate."

I don't see how that follows? Before, the Fed didn't pay banks any interest and now it does, and that's not going to change what most people think of as money. Money in the bank is still money as far as most people are concerned.

re: "there may become a mismatch in the trust of MB and M0"

This seems like a fancy way of saying the exchange rate might not be 1:1 but there's no way for that to happen. An account holder with the Fed could withdraw all their money as cash, and they could deposit any amount of cash in their account. Cash and money in a federal deposit account are always 1:1 and there's no way to "break the peg" because they can always print more money or increase the number in the bank account. People do prefer more or less cash at different times of the year, so adjustments are being made all the time.

re: "the Fed can't create M0"

This doesn't matter because the Treasury prints however much they ask for. Sure it's outsourced, but so what?

As far as I know the risk of QE has nothing to do with that. It's just ordinary inflation risk through increasing the money supply if the Fed buys too much stuff. It's not anything special.

When inflation happens, all accounts measured in U.S. dollars are affected equally. There's not a special kind of inflation for each kind of money.

> This doesn't matter because the Treasury prints however much they ask for. Sure it's outsourced, but so what?

Whenever the Treasury prints M0 money, the Federal Reserve Banks have to hold securities as collateral. Its not like the Fed Reserve gets the physical money "for free". All of the M0 money is effectively "paid" for through held collateral. The Fed is an independent, technically public company. They are at best quasi-government. They do NOT have the power to print money. Only the US Government proper (US Mint) can do so. And when the Fed asks for more M0 physical money, it has to pay up.

> Cash and money in a federal deposit account are always 1:1 and there's no way to "break the peg" because they can always print more money or increase the number in the bank account. [snip]

> When inflation happens, all accounts measured in U.S. dollars are affected equally. There's not a special kind of inflation for each kind of money.

https://www.investopedia.com/terms/b/breaking-the-buck.asp

Dollar Accounts in savings accounts are safer than Money Market accounts, but a savings account could "break the buck" if the commercial banks fail. At least, for the uninsured amounts above $200k or so.

The Central Federal Reserve Bank can theoretically fail, but if it ever happened the US would be in a lot of trouble. But Federal Reserve Deposits are just a number. Its really just a bit bank, and I'm fairly certain that if there was a $100+ Trillion run on money for some reason, the central bank would fail.

Again, the Fed cannot order the Treasury to print money without offering collateral. That's the law. The Fed can create Federal Reserve Deposits arbitrarily, because that's what is within its power.

And that's why "Federal Reserve Notes" are different than "Federal Reserve Deposits", even if the bank on the outside is exchanging them. "Deposits" are the number the Fed Reserve can make up, while "Notes" can only be made by the US Treasury.

Paper money is a voucher - it is credit "I owe you X weight of silver and promise to pay it on demand" in the case of older U.S. bills. Digital "credit" same sorta promise or lack of same. So this is really a distinction without a difference. Nobody likes the term "printing money", is all.

Way back when I advocated QE (before the term existed, and perhaps the concept, but probably not) I talked about it in terms of printing money.

> Paper money is a voucher

As further evidence, the Mint prints “Federal Reserve Notes” as currency. OP’s argument is misinformed.

". And this difference (paying it back, which negates the effects of QE over the long term) is why QE is okay."

You can't be serious. Why not QE to to tune of 100 Trillion?

Because at 100 Trillion, its unlikely that the Fed would be able to pay it back.

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