On money printing and how it actually is happening. All the time.

In fact, banks have been doing it every day for hundreds of years.

And also: a QE-variant previous threads here got wrong on the details.
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Let’s unify the Fed and the Banks into a single entity we’ll refer to, for fun, as a “banking cartel.”

And also because, by a strict definition of how a cartel operates and what it and what it does...

like... it just flat out is one.
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What does this Cartel do? Well… it prints money and buys whatever it wants. Every day. That’s the Cartel’s gig.

But there’s a lot of details involved, so it subcontracts all the annoying bits, like finding stuff to buy, properly valuing them, etc.
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Who does it subcontract to? Us, of course! Anyone who wants credit. Because when the bank gives us a loan, it’s really *the bank* buying something (hence why they take it away if we default).

So banking is, at the core, *actually printing money* to buy everything.
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The Cartel likes to rank their purchasing-subcontractors by dependability. To do this, they use a “credit score” and preferred subcontractors get preferred treatment.

And when things get dicey, they back off and only use the preferred purchaser-subcontractors.
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Corporates are like supra-preferreds, in part because they bring the Cartel so much business.

And the Cartel doesn’t like the Supras to get in trouble because if they do, in the end, the Cartel is left holding the bag since they issued all this debt that went rancid.
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How do corporates get in trouble?

Well one way would be if the Government (which is separate from the cartel) issued a ton of debt.

This could cause UST rates to rise, and if that happens corporate rates would rise too (why would you want BBB if USTs pay more?)
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The Cartel has a very active interest in seeing their super-contractors be able to continue to refinance their debt.

If that stopped for some reason, again, the cartel would end up as the bag holder.

And so what do they do?
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The Cartel buys USTs to force rates down, ensuring that the premium product (USTs) continues to yield less than the debt of their preferred subcontractors, so that their subcontractors can roll their debt forward and continue being Cartel customers.

Instead of going bankrupt.
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When the Cartel does this, they say things like “we’re preventing a collapse of the banking system.”

And like… this really is true.

What gets left out is that like… they *are* the banking system, so there are some self-referential incentives at play to be sure.
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Do they print money to buy them? It would appear that sometimes they may, indeed, do this. QE has a few variants.

The whole ‘reserves’ thing is kind of a red herring (see @JeffSnider_AIP work for more), but in the end they sometimes materialize money and buy USTs with it.
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But let’s pause for a second and return to the following: banks materialize money to buy things every day - every day! That’s lending.

They subcontract the purchasing details out to us, but it’s still *kinda* them buying it, since they can repo our purchases if we default…
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If you’ve bought a car or a house, you already know this: the bank has the actual title to your car if you got a loan, or the deed to your house if you got a mortgage. Because *they* bought it.

Banks materialize money to buy assets.

It’s literally the whole industry.
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And again: when economic times get rough, they start pulling back and only working with their preferred purchasing-subcontractors (those with the best credit), and they start trying to ensure the solvency of their supra-contractors too.
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And if, when the government issues a ton of debt, part of ensuring the solvency of their Supras means buying a boatload of Treasuries… well, then so be it.

“Whatever it takes” after all!
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Bluntly: certain detail in previous threads were incorrect (will be appending this thread to those), and that I got confused by the passthrough purchases banks are doing.

In that variant of QE, the Fed itself is *still* not printing money.

But the Cartel as a whole is.
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If you want to learn more about the bank (not Fed!) actual-printer QE variant, this is the white paper that cleared it up for me.

Special thanks to @HoofleDoofle and @Krasina15c for insisting over and over that I had this bit incorrect.
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https://economic-research.bnpparibas.com/html/en-US/QE-bank-balance-sheets-American-experience-7/23/2015,25852

But again, remember: “materializing money out of nothing to buy assets” is what the Cartel does every day. It’s arguably not a weird or shocking thing for them to do at any level.

It’s just another Tuesday for them.
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What causes weirdness is when they pull back on who they work with, and start to freeze out some of the subcontractors - less aggregate debt issuance tends to be deflationary.

One might also suppose that less contractor-v-contractor competition could be deflationary too.
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But we shouldn’t automatically connect direct, subcontractor-free purchases by the cartel with inflation. They are always purchasing, all day, and going direct is not typically what causes the hyper.

The hyper is usually when no value is exchanged in return.
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For example, the Weimar situation was the Riksbank printing cash (not debt) to give to businesses so they could meet payroll. Definitely gonna bring the hyper, that.

The fact that QE is a market-rate purchase of an asset… well…
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To my mind, it is indeed a bit vexing that QE is the cartel doing direct purchasing.

It's vexing because “using subcontractors to buy stuff with materialized money” is what we often refer to as “the economy” and they are freezing us out a bit.
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But it’s not *too* much different from the cartel’s ordinary course of business: buying assets with materialized money. In fact, the added efficiency might itself be a bit deflationary...

Still, I was wrong about an important detail - apologies for that.
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Part of why I like being on here is y’all twitterites keep me honest. It’s humbling. Seems the world could do with a little more of us all being able to admit when we get something wrong, and I'm happy to go first.

But I’m still in camp deflation.
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Because, if anything, QE represents the Cartel trying to ensure their best supra-contractor purchasers stay solvent in very rough waters.

Waters where there’s not a lot of borrowing.

And that’s deflationary.
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