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Fear & Greed Trader
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INDEPENDENT Financial Advisor / Professional Investor- with over 30 years of navigating the Stock market's "fear and greed" cycles that challenge the average investor. Investment strategies that combine Theory, Practice and Experience to produce Portfolios focused on achieving positive... More
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  • Market Myths ---- The Gov't Doesn't Print Money . 0 comments
    Feb 15, 2014 4:57 PM | about stocks: SPY

    I seem to answer the same question about various market and economic conditions over & over and so I have now decided to research and report my viewpoint regarding a lot of what I will refer to as "MYTHS" ---- The first installment :

    "The Government Prints Money "

    The government really doesn't "print money" in any meaningful sense. Most of the money in our monetary system exists because banks created it through the loan creation process. The only money the government really creates is due to the process of notes and coin creation. These forms of money, however, exist to facilitate the use of bank accounts. That is, they're not issued directly to consumers, but rather are distributed through the banking system as bank customers need these forms of money. If the government "prints" anything you could say they print Treasury Bonds, which are securities, not money. The entire concept of the government "printing money" is generally a misportrayal by the mainstream media and those that like to distort the facts to "make their case".

    Banks create most of the money in our system. Loans create deposits and deposits are, by far, the most dominant form of money in the economy. So, if you want to say someone "prints money" you would be most accurate saying that banks print money.

    The government is a user of bank money. When the government taxes Paul they take Paul's bank money and redistribute it to Peter when they spend.

    Now, if the government runs a budget deficit (taxes less than it spends) then Paul buys a bond from the government and the government gives Paul's bank deposit (which he used to buy the bond with) to Peter. Paul gets a bond which the government created in much the same way that a private corporation creates a bond when they issue corporate debt. If you want to say these entities "print" financial assets then fine. Corporations print stocks and bonds every day and you don't hear the world exploding with hyperinflation rants because of it…. BUT the folks that want to make "their" case for such , use the "money printing" theme as their backdrop.

    When the Fed performs quantitative easing they perform "open market operations " (just like they have for decades) which involves a clean asset swap where the bank essentially exchanges reserves for t-bonds. The private sector loses a financial asset (the t-bond) and gains another (the reserves or deposits). The result is no change in private sector net financial assets. QE is a lot like changing your savings account into a checking account and then claiming you have more "money". No, the composition of your savings changed, but you don't have more savings. Oh, how the QE naysayers have misinterpreted this fact..

    Cash notes like the ones you have in your wallet are created by the US Treasury and are issued to the Federal Reserve upon demand by member banks. This cash is literally "printed" by the Treasury, but serves primarily as a way for banks to service their customers. In other words, if you have a bank account you can exchange your bank deposit for cash from the ATM or the bank teller. Cash is preceded by the dominant form of money, bank money. But it doesn't get printed off the presses and fired into the economy as some would have us believe.

    So, there's no "money printing" in any of this unless you want to distort the role of cash in the economy or refer to lending and security issuance as money printing. Yes, QE alters the composition of private financial assets, but that's about it. No real "money printing" there either.

    So, after putting these thoughts down in writing , it seems pretty clear to me that those that continually rant about "money printing " aren't looking at the facts..

    Full disclosure - I own some money and may add a little more with some help in the future .. :)

    Here's a nice forum here on SA to share ideas on the market, from seasoned (another word for Old) investors to those just starting out ...

    seekingalpha.com/instablog/11150861-land...-5

    Themes: Money Printing Stocks: SPY
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