The Fed printing money? How absurd! And scary.

Mr. Ben Bernanke. Mythbuster!

“One myth that’s out there,” he told 60 Minutes, “is that what we’re doing is printing money.”

Ha. Ha. Ha. Can you imagine anything so laughable? So ridiculous? So absurd?

And to think that even we, at The Daily Reckoning, believed it. How could we be so credulous?

Of course, the Fed is not printing up money. How could we have been so naïve? The days of printing up money are long gone. Now, the Fed doesn’t do anything of the sort. Instead, it merely buys US government debt from banks. That’s not printing money. Nope. Not at all. Not even close.

But wait. How does it pay for the bills, notes and bonds it buys?

Oh, well, it certainly doesn’t print up money. Instead, it merely credits the banks with the money…electronically. No printing involved. The banks then have money that didn’t exist before.

The banks are supposed to lend it out. For every dollar they get from the Fed they can lend out 10. That’s how it works. So, IF anyone wanted to borrow the money, and IF the Fed had bought, say, $1 trillion worth of US government debt, the banks COULD lend ten times that amount…thus increasing the supply of money in circulation by $10 trillion.

Does that sound like printing money to you?

Nah… Of course not. Does it sound like it might cause inflation? Well, yes… It would be rather surprising if it didn’t. Consumer price inflation is now running at about 1% per year. Why so low? Because, so far, the banks aren’t lending. The Fed adds money to the system. But it doesn’t get passed along.

Why not? Because we’re in a Great Correction. The economy is saturated with debt. People are trying to dry out. And no matter how many times the Fed offers them a drink; they’re still on the wagon.

Of course, if the economy were to go on a binge again, the banks would lend, people would borrow, and all that money the Fed didn’t print would suddenly come out of hiding. Consumer prices would go up. Hyperinflation could come quickly.

Then what would Mr. Bernanke do? He says he would raise interest rates immediately, should the CPI hit 2%.

Well, dear reader, do you believe him? We do. At least as much as we believe he’s not printing money.

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