Ben Bernanke was disingenuous when he testified before the House Financial Services Committee on Wednesday. He again put forward the idea that quantitative easing does not increase the money supply. Please take a look at the following clip:
Quantitative easing is a little convoluted and many of our leaders seem confused with the process. Here is what actually happens: Congress and the President spend more money than they receive. They then sell Treasury bonds to raise money to pay these bills. These Treasury bonds are purchased by primary dealers such as J.P. Morgan and Goldman, Sachs. The Federal Reserve goes to these primary dealers and repurchases some of these Treasury bonds.
Bernanke states the Fed pays a primary dealer for Treasury bonds by increasing its funds held on reserve with the Fed; this is a direct increase of money supply because money is fungible. The primary dealer can now lend out a multiple of this money as normal, a secondary increase of supply.
To further explain, banks take the money they receive and lend it out to others. This means that the money the bank holds (its reserves) is only a portion of what is on deposit with the bank. We call this system fractional reserve banking and recognize that banks increase the money supply and are said to create money.
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