"The US national debt of US$36 Trillion is testimony that the statement 'the US government prints money' is a fallacy"One of the most widely perpetuated and commonly held misconception is that the US government prints money. It is shocking to hear this repeated by many familiar with finance and economics. I am sure you have read, heard and seen numerous videos of finance experts and Phds repeating this nonsensical line. The layman may be forgiven, but it is time to understand the truth.
Of course every government prints the notes and coins. The serious money is about digital money, the credit balances in customers' accounts in banks. The "money printing" fallacy refers to the government, with the click of a mouse, creates a credit balance in its own bank account, so viola it has the money to spend. The US government's banker is the Federal Reserve where it maintains the Treasury General Account (TGA). The reality is, like everyone else, the government has to put money into it's account before it can spend. All federal government revenue goes into this account and all federal government payment flows out of this account. If the government just "clicks" money into existence, why is there a national debt. It's such a low level logic that is so amazing people do not stop to ask themselves.
Except for North Korea of which I know nothing, the fact of the matter is digital money is created by the banks in the country, not the government. Banks create money simply by using their customers' deposits to lend to others. Their borrower takes the money and deposits into their account which then allows a second round of bank lending. This snowballing has a multiplier effect to the supply of money. This is called fractional banking. The government controls the banks by imposing a reserve or liquidity ratio which curtails banks from onlending the full sum of deposit money. Banks are required to maintain a certain percentage of customers' deposit money in their reserves account with the central bank. This is for liquidity purposes to ensure banks have sufficient liquid cash to meet customers' daily withdrawals. For bank viability the regulators look at other metrics such as capital adequacy.
Where proceeds of the loan goes to is varied depending on each borrower's instructions. All it boils down to is banks create money in the fractional banking process simply by the click of a mouse, that is, "printing" money, to disburse the funds.
A broad measure of money supply is M3. As at 30 Nov 2023 the M3 of the dollar is estimated at US$21 trillion. Although that is a massive figure, it is hardly enough to provide the liquidity needed to grease world trade and financial transactions. Recent estimates put about 80%-90% of global transactions involve USD. This may come as a surprise to many who has been exposed to the publicity of dedollarisation and the internationalisation of the RMB. The business world does not revolve around the trading of physical goods and services alone, it is inextricably entangled with the whole shebang of derivatives such as futures, options, swaps, foreign exchange, etc. It involves not just outright trading, but investing, hedging and speculating activities. As much as the world trade in physicals is, all the financial markets within which those physical goods are traded is a few hundred times much larger. In these derivatives market, the RMB plays a negligent role.
WTO estimated world trade in goods and services for the whole year 2023 was about US$33 trillion. BIS (Bank for International Settlements) Triennial Survey for 2022 estimated daily FX turnover was US$7.5 trillion daily and for the year about US$1.873 quadrillion. Assuming 80% is in USD that would mean trade of US$26.4 trillion compared to FX of US$1.5 quadrillion (there are 15 x "0" in a quadrillion!).
Let's take a look at another commodity vs derivatives comparative. Daily global oil consumption is 100 million barrels. Assuming US$80 barrel that would be US$8 billion per day. Futures and derivatives market is estimated 3 to 5 million contracts (Brent futures + WTI). Each contract is for 1,000 barrels so we have 5 billion barrels per day on the high end side. Based on US$80 per barrel total value is about US$400 billion. However this is the notional value. The upfront capital requirement is based on the margins which is about 5 to 10%. Again taking the high end, that means about US$40 billion daily. Physical US$8 billion compared to derivatives of US$40 billion. Oil is primarily traded in USD. There may be some transactions now in RMB but the derivatives and futures are still US$.
Just to get another sense of dollar transactions. I had a stint managing the back office of a bank. Our payments can hit US$1 billion on most days. Assuming just 50% is USD that would be US$500 million daily. We were just a small offshore branch. Imagine the larger banks and multiply that by the hundreds and thousands of banks all over the world.
Apart from trade, investments, speculation in financial markets, a massive amount of USD change hands domestically - people buy stuff, pay rent, pay salaries, remit cash for whatever purposes, etc. This is the "real economy". To get a sense of how much money is required to enable the economy, economists use the metric "velocity of money". Basically this says how many times a dollar is recycled in a country. The US is about 1.3; Singapore is about 0.81 (2023).
Except for North Korea of which I know nothing, the fact of the matter is digital money is created by the banks in the country, not the government. Banks create money simply by using their customers' deposits to lend to others. Their borrower takes the money and deposits into their account which then allows a second round of bank lending. This snowballing has a multiplier effect to the supply of money. This is called fractional banking. The government controls the banks by imposing a reserve or liquidity ratio which curtails banks from onlending the full sum of deposit money. Banks are required to maintain a certain percentage of customers' deposit money in their reserves account with the central bank. This is for liquidity purposes to ensure banks have sufficient liquid cash to meet customers' daily withdrawals. For bank viability the regulators look at other metrics such as capital adequacy.
Where proceeds of the loan goes to is varied depending on each borrower's instructions. All it boils down to is banks create money in the fractional banking process simply by the click of a mouse, that is, "printing" money, to disburse the funds.
A broad measure of money supply is M3. As at 30 Nov 2023 the M3 of the dollar is estimated at US$21 trillion. Although that is a massive figure, it is hardly enough to provide the liquidity needed to grease world trade and financial transactions. Recent estimates put about 80%-90% of global transactions involve USD. This may come as a surprise to many who has been exposed to the publicity of dedollarisation and the internationalisation of the RMB. The business world does not revolve around the trading of physical goods and services alone, it is inextricably entangled with the whole shebang of derivatives such as futures, options, swaps, foreign exchange, etc. It involves not just outright trading, but investing, hedging and speculating activities. As much as the world trade in physicals is, all the financial markets within which those physical goods are traded is a few hundred times much larger. In these derivatives market, the RMB plays a negligent role.
WTO estimated world trade in goods and services for the whole year 2023 was about US$33 trillion. BIS (Bank for International Settlements) Triennial Survey for 2022 estimated daily FX turnover was US$7.5 trillion daily and for the year about US$1.873 quadrillion. Assuming 80% is in USD that would mean trade of US$26.4 trillion compared to FX of US$1.5 quadrillion (there are 15 x "0" in a quadrillion!).
Let's take a look at another commodity vs derivatives comparative. Daily global oil consumption is 100 million barrels. Assuming US$80 barrel that would be US$8 billion per day. Futures and derivatives market is estimated 3 to 5 million contracts (Brent futures + WTI). Each contract is for 1,000 barrels so we have 5 billion barrels per day on the high end side. Based on US$80 per barrel total value is about US$400 billion. However this is the notional value. The upfront capital requirement is based on the margins which is about 5 to 10%. Again taking the high end, that means about US$40 billion daily. Physical US$8 billion compared to derivatives of US$40 billion. Oil is primarily traded in USD. There may be some transactions now in RMB but the derivatives and futures are still US$.
Just to get another sense of dollar transactions. I had a stint managing the back office of a bank. Our payments can hit US$1 billion on most days. Assuming just 50% is USD that would be US$500 million daily. We were just a small offshore branch. Imagine the larger banks and multiply that by the hundreds and thousands of banks all over the world.
Apart from trade, investments, speculation in financial markets, a massive amount of USD change hands domestically - people buy stuff, pay rent, pay salaries, remit cash for whatever purposes, etc. This is the "real economy". To get a sense of how much money is required to enable the economy, economists use the metric "velocity of money". Basically this says how many times a dollar is recycled in a country. The US is about 1.3; Singapore is about 0.81 (2023).
Another way is looking at USD settlements. Ballpark figure culled from Fedwire, CHIPS, ACH, ATMs and estimated dollar notes, is about US$6 to US$8 trillion daily.
There are those that say the Fed "prints" money when they do Quantitative Easing. This is when Fed buys government securities from the market. When the Fed buys securities, it pays for them simply by crediting the selling banks' reserves accounts. It pays for money which it does not have. Yes, this is the quintessential money printing. However, QE is only a temporary means to provide liquidity to the market. Excess liquidity is later sanitised by Quantitative Tightening when the Fed sell securities and banks' reserves accounts are debited.
There are other exceptional situations where the Fed "prints" money by crediting banks' reserve accounts. thus giving them the money to use. This is during financial crisis where Fed rescue packages take the form of short term easy credits. Banks are provided funds simply by the Fed crediting their reserve accounts. Again, these are short term in nature.
Then there are those who carelessly say the Fed buys Government securities at the Treasury auction. They pay for this by crediting the Treasury's TGA account, thus "printing" money. The fact is by law, the Fed cannot purchase government securities at the primary market. The Fed only purchases government securities in the open secondary market and only for the purpose of managing liquidity. Purchasing at the primary market is tantamount to monetising debt, that means, the Fed "prints" money for the government to spend. This never happens.
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That is all to say the M3 money supply of US$21 trillion is not enough to grease the wheels of global economy. So where else is the money supply coming from? The answer is the USD circulating offshore. According to BIS data (2023) there is about US$12-US$15 trillion in the Euromarket which refers to the USD-denominated deposits in banks outside US. This includes interbank lending, corporate deposits and sovereign holdings. There is another US$18-US$20 trillion in cross-border claims by non-US banks, much of these is held in jurisdictions like London, Singapore, Hongkong, Luxembourg and Cayman Islands. Then there is the shadow banking holdings or dealings, mostly hedge funds and money-market funds which account for another US$5-US$10 trillion. So ballpark figure is US$25-US$35 trillion.
So as can be seen, the USD ecosystem offshore is actually bigger than the domestic scene. Non-US banks with dollar deposits do what banks do with their customers' deposits - they lend out. Money never sleeps. So fractional banking of USD takes place offshore and dollar supply increases. This offshore money printing by offshore non-US banks is unregulated and there is no reserve requirements.
So as can be seen, the USD ecosystem offshore is actually bigger than the domestic scene. Non-US banks with dollar deposits do what banks do with their customers' deposits - they lend out. Money never sleeps. So fractional banking of USD takes place offshore and dollar supply increases. This offshore money printing by offshore non-US banks is unregulated and there is no reserve requirements.
Singapore banks record foreign currency transactions in the Asian Currency Unit which is heavily weighed in USD. This is a different set of books that segregate foreign transactions to avoid impacting domestic monetary policy. So to those Singaporeans who like to mouth sarcastically and erroneously the US prints their currency, consider for a moment that in fact, USD is actually also "printed" in Singapore.
There are those that say the Fed "prints" money when they do Quantitative Easing. This is when Fed buys government securities from the market. When the Fed buys securities, it pays for them simply by crediting the selling banks' reserves accounts. It pays for money which it does not have. Yes, this is the quintessential money printing. However, QE is only a temporary means to provide liquidity to the market. Excess liquidity is later sanitised by Quantitative Tightening when the Fed sell securities and banks' reserves accounts are debited.
There are other exceptional situations where the Fed "prints" money by crediting banks' reserve accounts. thus giving them the money to use. This is during financial crisis where Fed rescue packages take the form of short term easy credits. Banks are provided funds simply by the Fed crediting their reserve accounts. Again, these are short term in nature.
Then there are those who carelessly say the Fed buys Government securities at the Treasury auction. They pay for this by crediting the Treasury's TGA account, thus "printing" money. The fact is by law, the Fed cannot purchase government securities at the primary market. The Fed only purchases government securities in the open secondary market and only for the purpose of managing liquidity. Purchasing at the primary market is tantamount to monetising debt, that means, the Fed "prints" money for the government to spend. This never happens.
This platform has withdrawn it's subscriber widget. If you like blogs like this and wish to know whenever there is a new post, click the button to my FB and follow me there. I usually intro my new blogs there. Thanks.