You’ve probably seen some version of the following meme in the last few years. In case you haven’t it’s generally used to infer that Jerome Powell is printing money and hyperinflation is coming. I love a good meme and few things make me happier than hilarious nonsense on the internet. So I feel bad debunking this meme because it’s kind of funny and memes are mostly harmless, but this is one of those memes used by people who want you to believe something that isn’t right. Anyhow let’s get into it.
Problem #1 – Jerome Powell Doesn’t actually Print Cash.
Let’s start with a really basic problem in this meme – the Fed firing cash out of the money printer….
That cash that Jerome is firing out of the money printer isn’t really in his control. Technically, the cash in your wallet says “Federal Reserve Note”. But the cash in the system isn’t really a function of Fed policy. It’s controlled primarily by private banks and the demand for cash from their customers. The basic way to think about this is that banks create deposits. And banks allow the rest of us to withdraw some deposits and convert them into cash. So, when a bank has customers that need cash (assuming the bank doesn’t have any yet) they call on their local Fed Bank to issue them some cash. And the Fed relies on the US Treasury to print up some physical notes and sell them to the Fed at cost. And then the bank swaps some reserves for physical cash. And then the bank makes the cash available to the customer.
All this exchanging of money really only did one thing though – it helped a bank customer convert AN EXISTING deposit into a cash note. The new cash wasn’t new money. After all, the deposit was already there. The deposit was the new money in the first instance when the bank created it. So, when that bank customer withdraws the money their deposit balance goes down and their cash balance goes up. The Fed didn’t create new money when they issued the cash to the bank. They simply created a new asset that allowed a bank customer to swap deposits for cash. And when the customer ends up with the cash there are now FEWER deposits in the system and more cash. But the quantity of assets that households have remains the same. The Fed helped change the composition of assets, but they didn’t change the quantity of the assets.
In sum, that cash came from the US Treasury and after the cash is distributed there isn’t necessarily more money in the system than there was before. There’s just a different type of money (cash vs deposits) floating around in the same quantity. For practical purposes, J Pow had nothing to do with any of this.
Related: Where Does Cash Come From?
Problem #2- Jerome Powell Doesn’t Really Have the Money Printer.
One of the big lessons coming out of the Financial Crisis was that the Fed doesn’t really have a money printer in any meaningful sense. The Federal Reserve is basically just a big clearinghouse to banks. They mostly just transfer interbank payments and most of the stuff we constantly hear about in the press (changing rates and QE) is tangential to this core function. They operate this payment clearing by printing reserves into the interbank market and the banks use those reserves to clear payments in a more stable manner than if they did it on their own.
But what about QE and all that “money printing”? The simplest way to think of this operation is when a bank sells a T-Bond to the Fed. The bank gets a new cash reserve. And the Fed gets the bond. Yes, there’s technically more “money” in the private sector, but the T-Bond was also taken out of the private sector. The bank essentially swapped an interest earning savings account in exchange for a lower interest earning checking account. This is why I always emphasized that QE is an “asset swap”. There’s no meaningful balance sheet expansion going on here and we could actually argue that the bank is marginally worse off because its income went down. And that’s the main reason why I was never worried about inflation coming out of 2008. The Fed could technically print a bunch of money, but for every dollar that Jerome shot out of the “money printer”, an equal amount of T-Bonds got sucked out at the same time.
Of course, this is all related tangentially to fiscal policy, which could rightly be referred to as “money printing”, but QE in and of itself is not proper “money printing” in any useful sense.¹
Related: Understanding Quantitative Easing
Problem #3 – Jerome Powell Doesn’t Enable Fiscal Policy.
When I explain point #2 to people they will often argue that the Fed “funded” all the fiscal policy and in doing so they essentially enable all the government spending that’s going on. Okay, this is an important point. Fiscal policy IS balance sheet expansion in a meaningful way. When the US Treasury spends and prints new T-Bonds that can be thought of as a form of “money printing” (or, more properly “bond printing” in the current funding regime). So, it’s crucial to get the flow of funds right here. The Treasury spends the money and funds it by selling new bonds. And then whatever the Fed does through QE is just an afterthought. The Treasury changes the quantity of the assets and the Fed changes the composition.² Most people get this backwards by assuming that the quantity is controlled by the Fed.
Now, it’s true that fiscal policy can be inflationary. That’s why I said last year that I was much more concerned about inflation this time around. The US Government really did print a ton of money (bonds). But this wasn’t enabled by the Fed. And no, the Fed buying the bonds isn’t why the Treasury was able to spend all that money. The Treasury was able to spend all that money because inflation is low.
This is where a lot of people, even some rather savvy ones, get tripped up. They assume that the only reason interest rates are low is because the Fed bought the bonds. But this can’t be true because we know that inflation is low. Yes, if inflation was high and yields were low then I’d admit that the Fed was having a huge impact on fiscal capacity by keeping rates much lower than they would otherwise be.³ But interest rates are low AND inflation is low which tells me that interest rates would be very low even if the Fed wasn’t buying bonds. So no, the Fed isn’t enabling fiscal policy through QE.
Problem #4 – The Fed’s Powers are More Constrained Than Many Assume.
The main problem with this meme, aside from all the operational misconceptions it’s based on, is that it assigns a false degree of power to the Fed. Sure, the Fed is a powerful entity and I am not denying that they can theoretically do things that would cause inflation. But the traditional way in which we think of the Fed is misleading. The US Treasury is the entity with the money printer and most of what the Fed does involves changing the composition of those printed assets or other tangential policies that work through secondary channels.
Anyhow, I apologize to this meme. It’s not personal.
¹ – Monetary Policy has many transmission mechanisms so I don’t want you to think that QE or other policies do nothing. But the general description of these operations in the media are much more complex than we are often led to believe.
² – Certain Fed lending programs are properly thought of as “money printing” in the sense that they’re balance sheet expansions that generally help the private sector maintain a higher balance sheet level than they might otherwise experience. For instance, many of the bank lending programs coming out of 2008 helped banks survive in an environment they might not have otherwise been able to survive.
³ – An example of this would be yield curve control. The implementation of yield curve control on the long end of the curve would be a clear indication that the government feels that it must pin long-term rates lower than they otherwise would be, in order to fund government spending.