Tuesday, March 2, 2010

Let's Print Money, Here's How.

Axel Merk writes today about the issues in the currency markets and Greece in particular. His article today is fascinating, telling his story of what has conspired to create the problem Greece finds itself in, without doing anything differently from what it has always done. The title of his article is Greece - From Hard Money to Fool's Gold. In this article he also describes very simply a money printing scheme that helped me better understand this transaction. Turns out it is more of a concept or virtual transaction. Here is his description...

..."here’s a crash course on how to print money. In the U.S., it’s quite simple: the Federal Reserve buys a security – anything, really, – from a bank and gives them cash in return. That cash is an entry on the balance sheet of the Fed and the bank – voila, that’s it, money has been ‘virtually’ printed. Often these purchases are not permanent in nature, but constitute short-term financing operations where cash is provided by the central bank overnight (these days for longer periods as well)."

"The “anything” has to be qualified: the Fed is not in the business of taking on credit risk. As a result, the Fed traditionally has bought only government bonds; the credit crisis has watered down the definition of what the Fed may buy, but it remains committed to the principle."

In this virtual reality, it seems just as likely that when the Fed sees the time for money to be removed from the economy, a reverse virtual transaction is used. If I get it, that would be simply selling a security held at the Fed to a bank for cash and then removing an equal amount of cash from the virtual Monetary Base. Voila! It's gone. The ultimate easy come, easy go! No wonder Bernanke won't stop, it's actually not complicated. It is simple and it's effective.

A very important rule of the game that this virtual money can never be spent on anything other than paper. It cannot be allowed into the hands of spenders. The use of this money is only to make things appear better than they are. This money is only to be use for accounting shenanigans. For example, you want to sell your $billion of  T-bonds, I'll print off the money and I'll mark your account for the cash and my account for the bonds. Now I own some T-bonds and you have some new cash. Your books look good and so are mine.

Now I want to sell some of the poor quality mortgage bonds I've accumulated. I'll sell them to you at the market price. (I paid face value.) Let's make it for the same amount of cash you just received. I'll transfer the low grade bonds off my sheet and move the cash back into the money press. I just shrunk my balance sheet, improved my quality rating and you are in a position to trade the junk for a potential profit. I think this works. Any comments? Scanner