This division of powers between the federal government and the central bank is what keeps the money supply relatively stable

Friday, April 9th, 2021

Printing money requires both nuclear keys:

The Federal Reserve can create new base money, but doesn’t have a mechanism to spend it into the real economy. The Treasury, on the other hand, can spend money on behalf of Congress, but has to issue bonds to do it, which sucks money out from somewhere else in the economy. In other words, the Treasury mostly just moves money around. This division of powers between the federal government and the central bank is what keeps the money supply relatively stable during most times in history, and leaves money creation mostly to the commercial bank system.

However, the combination of the Treasury and Federal Reserve working in concert results in a sharp rise in the broad money supply. With this approach, the Treasury spends money into the economy at a massive scale, and the bonds that are issued to pay for it are bought by the Federal Reserve with brand new base money, resulting in outright broad money creation. This close collaboration between the Treasury and the Federal Reserve occurred in the 1940s, and began occurring again in 2020.


During the subprime mortgage crisis, the Federal Reserve rapidly expanded the monetary base, but the Treasury’s response was more modest. If we continue with the nuclear key analogy for money-printing, only the Federal Reserve’s key was used. The Treasury did not use their key back then; little money was handed out to the broad economy.


Banks went into the 2008 crisis woefully under-capitalized, much like 1929. In response to a systemic failure of the banking system in 2008, the Federal Reserve created trillions of dollars of new base money to buy some of their assets, in a process referred to as quantitative easing. Additionally, fiscal bills removed troubled assets from bank balance sheets and provided very modest aid to the public. There was, however, no broad bailout of homeowners or other members of the general public other than for relatively small programs like “cash for clunkers”, and this dichotomy of bailing out Wall Street more than Main Street contributed to the rise of both left-leaning and right-leaning populist movements, ranging from Occupy Wall Street to the Tea Party.

All of this new base money in 2008, in other words, mostly remained in the banking system to recapitalize the banks and to decrease leverage ratios. As a result, the broad money supply didn’t spike at all, since people were not getting stimulus checks and there was no massive fiscal policy response.

Fast-forward to 2020, we went into this pandemic crisis with very different circumstances. Banks were well-capitalized this time from a combination of prior bailouts, leverage regulations, and more risk-averse lending behavior. Indeed, the banking system had plenty of excess reserves going into this crisis.

Instead, the economic shock came directly to consumers and businesses, and the fiscal response of providing stimulus checks, federal unemployment benefits, small business loans that mostly turn into grants, and a variety of other forms of aid, directly increased the broad money supply. Finishing with the analogy, both “keys” were initiated in 2020; the Federal Reserve created even more base money than before, and unlike 2008, the Treasury also sent out massive checks to inject it into the broad money supply, with massive fiscal deficit levels as a percentage of GDP that had not been seen since the 1940s.


  1. VXXC says:

    “The Treasury did not use their key back then; little money was handed out to the broad economy.”

    Well more money was handed out this time, but you are talking hundreds of billions in aggregate to the actual citizens, while you’re talking several trillions handed free to governments, corporations for ‘bailouts’; see Boeing, and of course banks. This all taking place while the billionaires became vastly richer and thousands of small businesses closed, millions became unemployed. The truth is we’re having another Russia in the 90s moment of looting, criminality and wealth transfer while the people are being politically and economically repressed in the name of a fake pandemic that’s really just a bad flu season, with COVID taking the place of the flu. Where is America’s Putin?

    Before it starts, Boomers and hypochondriacs, I don’t for a moment believe the death stats. COVID present with fatal co-morbidities is not death by COVID.

    Liars lie. Statisticians…the word lie does not begin to explain…

  2. Foseti says:

    The media/academia were so orgasmic over all of Biden cabinet picks they didn’t stop to note the issues created by appointing a former leader of the Fed to run the Treasury. With Yellen running Treasury, the (already very stretched) idea that there is independence between the Fed and the Treasury is basically dead. You’d have to be an academic to believe it at this point.

  3. Wang Wei Lin says:

    Treasury and the Fed same as a magician and his assistant.

  4. Jim says:

    The government creates trillions of dollars out of nothing and distributes it to the rich and powerful and well-connected because the economy is how value is created. Note the steps in the sacred process of value creation:

    1a) The need for dollars is created through the imposition of costs of living.
    1b) To be able to eat, drink, be well-clothed, and have a place to live, people need dollars.
    2a) To get money, therefore, people must work.
    2b) Usually, they end up working not for themselves but for shareholders, who became shareholders by investing the dollars created for them by the government.
    3a) People work, and the profits of their work accrue to the shareholders.
    3b) The profits are paid out as dividends each quarter, completing one “stroke” of the economy.
    4) The dividends are reinvested, begin again at (1a).

    So you see: if you give money to ordinary people, they will invest that money, and if they are able to invest enough, they will no longer have to work — congratulations, you have destroyed your economy.

  5. Buckethead says:

    Foseti, good to hear from you again.

  6. Isegoria says:

    It’s good to hear from both of you, Buckethead and Foseti!

  7. Jim says:

    Foseti, the Federal Reserve is now openly calling itself a, quote, “private bank”, and is entering into direct competition with the payment processors in an effort to kill off the negotiable instrument as a real concept. It’s so much worse than you can even imagine.

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