00:00 Speaker A
That brings us to money printing today. A phrase almost everyone uses and few people explain.
00:06 Speaker A
Most modern money is created not by the Federal Reserve, but by commercial banks.
00:11 Speaker A
When a bank approves a mortgage, it generally does not take money from one customer’s account and hand it to another.
00:17 Speaker A
It creates a loan on one side of its balance sheet and a matching deposit in the borrower’s account.
00:24 Speaker A
New deposit money has entered the economy, as the principle is repaid, that money is destroyed.
00:30 Speaker A
Banks cannot do this without limits.
00:32 Speaker A
They need capital, funding and creditworthy borrowers.
00:35 Speaker A
They face regulation and central banks influence credit conditions.
00:39 Speaker A
But the important point remains, most money is born when someone goes into debt.
00:45 Speaker A
Central banks create a different form of money.
00:48 Speaker A
During quantitative easing, the Federal Reserve buys bonds and pays by creating bank reserves.
00:53 Speaker A
When it buys from a non-bank investor, the transaction can also create a commercial bank deposit.
00:59 Speaker A
Those reserves are not stacks of currency that banks mechanically lend to households 10 times over.
01:05 Speaker A
Banks do not lend reserves to consumers.
01:07 Speaker A
Their lending depends on capital, funding, borrow demand, risk, and profitability.
01:13 Speaker A
This helps explain why the response to 2008 did not immediately produce runaway consumer inflation.
01:18 Speaker A
The pandemic was different.
01:20 Speaker A
The Federal Reserve again created enormous liquidity, while Congress authorized fiscal support that reached households and businesses directly.
01:28 Speaker A
At the same time, lockdowns and supply disruptions reduced the economy’s ability to provide goods and services.
01:35 Speaker A
More purchasing power collided with constrained supply.
01:38 Speaker A
Inflation naturally followed.
01:40 Speaker A
Even here, they printed money so prices rose is incomplete.
01:45 Speaker A
Energy, supply chains, labor, and consumer behavior also mattered.
01:49 Speaker A
But fiscal transfers increased demand when production could not match it.
01:54 Speaker A
One Federal Reserve study estimated that American fiscal stimulus contributed roughly two and a half percentage points to excess inflation through February 2022.
02:01 Speaker A
The destination of newly created money matters.
02:05 Speaker A
The condition of the economy matters.
02:07 Speaker A
The credibility of the issuer matters.
02:09 Speaker A
Money supply matters, but it is not the only variable.