Money printer go Brrr is a great meme, but I think there’s a lot of misconceptions about the Federal Reserve and it’s ability to print money.

While the Fed is certainly distorting price discovery, it is not (yet) dumping large amounts of money directly into markets.

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Lets start with QE.

Quantitative easing increases the monetary base, but that money does not turn into actual deposits, it stays as reserves.

This is why the base has increased dramatically, while M2 has grown at a relatively constant pace.

You can think of QE as hyper specific manipulation of interest rates. Not new money in the broader economy!

But by moving rates lower, people are more willing to borrow. New credit demand -> new loans/refinancing -> increase in M2 and money in the economy.

This is why many Austrians incorrectly predicted hyperinflation in ‘08. The Fed is causing money printing, but in a roundabout (and less potent!) way through incentivizing more debt by lowering borrowing costs.

Rates are lowered, people refinance, and the cycle continues.

A large point of confusion for people is that while QE increases reserves in the system, banks cant lend reserves!

The fractional reserve banking model died a long time ago. Today, creating a new loan conjures new money out of thin air. https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/senior.fellows/2019-20%20fellows/BanksCannotLendOutReservesAug2013_%20(002).pdf

What’s interesting to note here is that increased indebtedness has diminishing marginal returns.

As we are already in debt up to our eyeballs, lowering interest rates even further becomes less and less effective at creating new loans. We already have too many!

New more and more debt becomes a snake eating its own tail. As debt increases, there are fewer and fewer productive places to park capital. Malinvestment grows and fundamnetals become more shaky.

Hence we’ve seen markets drift higher for a decade as large amounts of stock buybacks occur with cheap debt.

It’s important to recognize, “stonks go up” is a byproduct of fed intervention, but very different from direct money printing causing it.

This also explains why the Fed is so adamant about how much money they are “printing”.

They are trying to do everything they can to convince the market (and especially retail traders) that the fed is omnipotent and has the market’s back.

Thus, the recent rally is a funny one. It’s not from the Fed printing like crazy, but from the Fed *convincing traders* they are printing like crazy. This is key.

This rally is not evidence of how directly powerful the Fed is, but how well retail was convinced to buy the dip.

Despite adding trillions in repo, swap lines, and temporary credit Facilities, none of that is propping up the S&P, and none of it is hitting the broader economy.

As of now, it is only to manipulate credit spreads and currency squeezes.

The federal reserves signaling they are printing as fast as possible seems like they are panicking and trying to buy the market time more than anything else.

The current rally will probably end like Japan in the 90s rather than Venezuela.

However, this will likely change in the coming years. Youll notice M2 has grown dramatically in the past few months—this is from new government debt.

Because new spending projects are effectively loans, this is the real money printing. As you can see M2 is headed straight up.

As the pain from real deflation (I.e. unemployment/bankruptcies) spreads, there will be stronger and stronger calls to ease the pain through inflation.

We’re seeing the beginnings with temporary UBI and PPP but this will likely grow in size and scope.

Ultimately, we may see a complete revision of the federal reserve act so that it legally *can* directly print money into the economy. Politicians love to earn votes with promising something for nothing.

This is when we need to really become concerned about inflation.

That’s my current take on where things stand: 1) Deflation in the short term. 2) Big time inflation in the future. 3) Protect yourself with Bitcoin.

I’ve written on this topic here—explaining how today’s money printing works in a bit more detail. https://digg.com/@_ConnerBrown_/money-printer-go-brrrrr-bitcoin-s-solution-to-the-federal-reserve-cKVslTOF