How does the Fed create money?
Well, I'm fairly smart, and I thought that I understood this, but maybe I don't. To me, it seems like a shell game. So, how does the Fed create money?
One explanation here:
http://www.econbrowser.com/archives/2007/09/money_creation.html
"And where did your bank get that cash? If it is a member of the Federal Reserve, your bank got it from a Federal Reserve Bank. And the reason that the Federal Reserve was willing to give your bank the cash was that your bank had deposits in an account with the Fed, that give it credits to obtain cash when it wants it. These credits are known as Federal Reserve deposits, which I'll simply refer to here as "reserves" for short.
And where did those reserves come from? The standard mechanism is that the Fed purchased Treasury bills from independent securities dealers, paying for them by creating new reserves in the dealers' banks. The Fed now is the owner of the Treasury bills, and those banks now have new reserves, which they could use to obtain new dollar bills, if they desired."
So if the US is short a trillion, it issues a trillion of T-bills and sells them on the open market. China, Russia, etc.buy 1/2, or 500 billion, and the other 1/2 (500 billion) is bought by the Fed.
Now the Fed just magically "creates" new reserves in its member banks for this 500 billion dollars.
Then, the U.S. has to pay the 5% interest on the T-bill note to the Fed, but the Fed has a profit sharing agreement with the U.S. gov't. that it takes "only" 6% of all profits over expenses. So it gives back 4.7% of that 5%, and keeps 0.3% interest on 500 billion. Not much, you say? Well, 0.3 of 500 is 1.5, so the Fed makes a profit of 1.5 billion a year on this 5 trillion dollars of notes that it holds.
But the U.S. gov't likes it, too. It got to print 500 billion dollars of money without being obvious about it, and is only liable for 0.3% interest on the T-bills that is sells to the fed, vs. the 5% that it sells to China or to Russia.
It gets more complicated than that, but is this how the shell game works? Need some guidance from those in the know.
