From my understanding, they hold most of that in reserve accounts with the Federal Reserve. But yeah, someone at some point holds some cash. But of the total US money supply (in 2018), physical currency makes up about 11% of the total value[0].
Edit: Downvoted, and I'm guessing it's the source? This is legitimate fact though. Here's the fed's own announcement.
> In light of the shift to an ample reserves regime, the Board has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period. This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.
Where does the Fed get the money to be a lender of last resort - by printing the money and generating inflation? If so, then how does this inflation impact the purchasing power of these last resort dollars?
I often like to take things to a logical extreme. Since the Fed can simply print all this money into existence, is there a limit to their ability to print? I mean couldn't they simply print their way out of any economic crisis or would this result in another Weimar republic situation? -- genuine question.
Printing money does not always cause inflation. The purpose of the Fed is to keep the dollar's value stable. If demand for the dollar rises, the Fed has to print money to avoid deflation.
The common mantra "When a measure becomes a target, it ceases to be a measure." applies here too, but many HN peeps seem to think it doesn't for some reason.
If you remove the constant adjustments to the CPI you get a _much_ higher rate of inflation than governments will admit.
One year ago the dollar was deflating, so this is cherrypicking data. If inflation was above 4% for multiple years then that would be a problem, but a month or two is not anything to be worried about.
I'm also not sure why you think adjustments to the CPI should not be allowed. Individual goods get cheaper or more expensive relative to other goods, and consumers change their behavior. It would be asinine to have the government subsidize certain goods (via economic policy) such that all consumers purchase the same basket today as they were in 1990!
I don’t particularly want my dollars to “hold value”.
I want currency to be useful as currency; I want my investments to hold value. The two things serve different functions, and I don't want investments compromised to be useful as currency or vice versa.
> I don’t particularly want my dollars to “hold value”
Sure, but would you really rather your dollars "lose value" as in they can purchase less and less goods and services over time? How does that benefit you personally?
> Sure, but would you really rather your dollars "lose value" as in they can purchase less and less goods and services over time?
Yes. Mostly, because of systemic effects on the broader economy I need to have functioning to earn a living, but also because of more direct personal benefits.
> How does that benefit you personally?
Because other than a small share in cash and the bank for liquidity, my assets aren’t dollar denominated, but my debts — which, while smaller than my total assets, are much larger than my dollar-denominated assets — are almost entirely dollar-denominated.
I agree that it's nice if you have assets, but I believe for most people we can't have nearly as many assets and or connections as the wealthy.
And for young people, they're basically priced out of assets by this system. _This_ literally is the reason owning a home is next to impossible for millennials and gen-zs.
Further, this encourages a debt based society that may encourage growth in the short run (debt giveth first), but then when the debts are due it holds the economy back. Typically this looks like the 2008 crash and is coined the `business cycle` by modern economists.
> when the debts are due it holds the economy back.
This is just wrong. The only debt that holds the economy back is debt that didn't actually generate growth. If you borrow to start a business, you are stimulating the economy with growth, through debt. If you rack up credit debt at the bar every weekend, you're going to cause yourself problems.
The topic is just more nuanced than you're implying. Debt is very good for the economy overall, as long as you're not overdoing it or taking on frivolous debts that don't let you grow.
Student loans seem relevant here. I take out 50k of student loans. The degree I earn empowers me to make 50k/year. After 2 years that debt has been turned into profit, and that's only for me personally, ignoring the value my education will bring to my employer, the community, and the economy at large.
Another example of good debt can be a car. I purchase a 20k car, with credit, which allows me to make 70k instead of 50k, in the next town over. After a year, that debt has paid itself off and is now earning for me, despite the fact that the value of the car instantly dropped 20+% as soon as I purchased it.
The idea that debt holds the economy back is terribly misinformed and over simplified. It's literally how we grow, and how the US has become the economic powerhouse it is. The most wealthy nation in the history of the world (what we do with the money is a different topic).
Most people have nonfinancial assets (e.g., durable items of personal property.)
> _This_ literally is the reason owning a home is next to impossible for millennials and gen-zs.
No, its not, because its been true (and inflation higher) for preceding generations, so it can’t possible explain why Millenials and beyond have it worse than Gen X who had it worse than Boomers. Tax and spending policy shifts (Reagan's being the biggest single one nationally, but there have been several subsequent national ones, and CA Prop 13 and its — mostly much weaker — copycats play a role, too) are a much bigger factor
> Typically this looks like the 2008 crash
The 2008 crash wasn't a regularly occurring event. (And as bad as it was, wasn't nearly as bad in and of itself as it is widely perceived; it gets magnified because — again for reasons that trace directly back to fiscal policy choices — the expansion after the brief and shallow 2001 recession was, up to that point, pretty much the most hollow expansion in modern US history, with, IIRC, every income quintile but the top doing worse, and even the top being mostly flat except for the top couple percent.)
How much money do you have in dollars? I have an emergency fund — 6 months of expenses. Everything else is in other assets that store value after inflation (e.g. stocks, bonds, housing).
> How does that benefit you personally?
A little bit of inflation means more economic growth in the long run. That benefits me because services and goods will get cheaper and/or better.
Not much, in fact I try to remain leveraged via debts to hedge against inflation.
But my salary is measured in dollars. I fought hard to get the salary I have today, but I must continue to ratchet up as my employment deal looks worse every year.
I believe the Cantillion effect is largely why the average peasant's wages have not kept up with asset prices.
Inflation means wealthy (with assets) get wealthier.
> A little bit of inflation means more economic growth in the long run.
When you play tricks with the CPI it does look that way. It's easy to say there's growth when revenues grow beyond a poor measure of inflation.
Inflation discourages savings and thus makes money look easy. As such, it actually encourages bad investment. Further, the business cycle that Kaynsians say are just a natural part of a large economy are really caused by over leveraged banking credit bursts.
If half of the dollars in circulation are just debts owed between banks, then that bubble bursts, it's no surprise that asset prices would fall--there's literally fewer dollars in circulation.
It's no big deal for those involved in fed policy making as they are usually the first to see it coming (and or instigate it with higher interest rates) and generally move their positions back to dollars just prior to a credit bubble burst.
But for those of us that leverage ourselves to hedge against inflation (buying a house), we get caught with a heavy loan on an asset that's no longer worth as much as the loan on it.
One should be open to viewpoints external to those provided by the people in charge of and profiting from the system.
Your salary is measured in dollars, but inflation affects your salary as well. When companies charge more for products, where do you think (some of) that extra money goes?
The rest of your comment has some interesting hypotheses (Cantillon effect, inflation encouraging bad investment) but in practice, you have to make measurements to see whether those effects actually happen. I haven't seen any empirical evidence for the Cantillon effect, and empirically we have evidence that a small amount of inflation does not decrease output (and can increase output in some cases).
> The Fed's goal is to maintain inflation at 2% for reasons more complicated than I'll discuss here.
It would be amazing if you could make the effort to explain the complicated reasons why the Fed's inflationary policy is a good thing. I have yet to hear a sound argument why sound money is worse for the people, than an inflationary currency. I can see how it would benefit the government to hide the true cost of taxation via inflation, but why does it ever benefit the individual to have their wealth diluted by the process of inflation, even if it is "only" by about 2% per year?
I can't do this topic justice from memory, but you seem to be genuinely interested, so I'll say what I can.
It seems related to the petrodollar system. This is where the world uses USD for energy (OPEC only sells oil for dollars). This forces countries who need oil to acquire dollars. However, there's a problem with that: a limited supply of dollars. How do we fix that problem? Use a fiat currency (not backed by something tangible) that allows us to print more money as necessary. How much more should we print? The target is 2% inflation, so that much is what the experts in this topic think.
This petrodollar system does a lot more than just force us to have inflation. The subject from here becomes more and more complicated, because monetary systems are highly complicated. There's a lot going on in the US fiscal policy, and the impacts vary from very good to very bad, depending on your perspective. It's in fact so complicated that I can imagine for every perspective there are good parts and bad parts of our monetary system.
There's a lot of talk in this thread and on the internet in general, especially around cryptocurrencies, that is massively oversimplified and doesn't pay any mind to the fact that, like any other field, there are many very intelligent people working to solve very difficult problems. If a monetary policy can be summed up in one sentence, it's probably not a good policy.
[0] https://www.businessinsider.com/heres-how-much-us-currency-t...