Did the Fed print money to buy bonds?

Published 7:00 am Saturday, June 6, 2015

Much has been said through the news media about the Federal Reserve System( running the printing presses to print trillions of dollars to purchase securities of the U.S. Treasury bonds and home mortgage bonds from Ginny Mae, Freddie Mac, and Fannie Mae on the open market. This is misleading to the public because the U.S. Department of Treasury’s Bureau of Engraving and Printing is America’s only source of coin and printed currency.

The new money is created by highly technical means and methods to which the average American is never exposed. Therefore, since 2008, opting for expediency, it has been easier to say the Fed is printing the money. It is beyond the scope of our exercise here to attempt a detailed explanation of the monetary theory involved. So some readers might follow this ok, others will have to resort to the basis as those of us who ascribe to the Christian faith; we go by faith, and not by sight.

Every bank in America has an account with the Fed, and is required to keep reserve balances on deposit with the Fed. The first of three major components of the QE process is the fractional-reserve system of America’s commercial banking system. Secondly, the Fed’s financial balance sheet for the accounting of assets, liabilities and equity is the source of the money creation, and thirdly, the Fed’s information technology computer systems serve as the vehicle that brings it all together.

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According to David Wiedemer, Robert Wiedemer, and Cindy Spitzer, authors of the New York Times Bestseller series, “Aftershock,” the process begins when the Federal Reserve’s 12-member FOMC determines to increase the money supply, or not, and if so, by how much. During the three QE phases from 2008 – 2014, the amount of money created ranged from $40 – $85 billion per month for the Fed to purchase bonds on the open market attempting to stimulate the recovery of our failed economy in the stock market and housing sectors, which we have discussed.

A directive was then sent to the Federal Reserve Bank of New York to begin the process. The New York Fed then buys the bonds on the open market from a select group of the primary dealer banks such as JPMorgan Chase and Goldman Sachs. These big banks then make bids to sell bonds to the Fed on behalf of their clients who want to sell bonds.

After the traders at the Fed pick the best bids from the sellers and make their bond purchases the transactions are entered in the Fed’s balance sheet with a debit to its asset bond account, and a credit to the selling bank’s liability reserve account.

Here is where the surprise of money creation becomes a reality. Before the big bond purchases take place, the money that will buy the bonds did not exist. The new money comes into existence at the time the Fed’s balance sheet is changed to show these transactions. That’s it, the Fed just changes the numbers on its balance sheet.

Prior to QE beginning in 2008, America’s money supply approximated $800 billion; at completion of QE in 2014, the money supply had been increased 400 percent. Remember this number for inflation purposes later. Take heed of 2 Chronicles 7:14.

By Aaron Russell.