The Fed’s Magic Money Machine

By | March 10, 2022

In a previous Business Brief, we told you that inflation was caused by “printing money.” Not paper money – the Federal Reserve creates brand new electronic dollars with a keystroke.

Since 2020, the Fed has purchased $4T of bonds (previously issued U.S. Treasury securities and agency securities backed by bundles of home mortgages) from commercial banks. How did the Fed pay for these bonds? It printed money, in the form of brand new electronic dollars credited to the banks’ reserves.

This means that one arm of the government (the Federal Reserve) created new money in order to buy previously issued debt of the same government (via the U.S. Treasury).

Concurrently, the Fed printed an additional $2T in new money to finance loans to businesses, states and local governments.

All in, the Federal Reserve created over $6T in new money over the last two years. These steps contributed to the dramatic increase in the M2 money supply and the inflation we face today. #gracestone