As you read this, keep in mind that Mr. McTeer says he "ran the Baltimore Branch of the Richmond Fed" and "taught a Money and Banking course in the graduate ... program of The Johns Hopkins University" ... using "standard stuff" ... out of "standard text books". Is there any hope for us when material like this is being taught daily, proudly and boldly to unsuspecting graduate students by professional bankers? It makes me want to cry. If I owned stock in an American company, I would be tempted to sell it tomorrow. How can we compete when our college students are being taught this type of stuff out of "standard textbooks". And remember -- I did not have to scour the internet to find this article. By returning this to me at #2, Google is telling me that this is a very popular site -- it is not easy to get to #2. (mrc)

Notes by Marty Carbone follow -- I express my negative questions and comments with the words shown in the blue type

1. Money creation doesn’t cause inflation until it is spent. Isn’t it obvious that the newly created money is aimed at being spent or primarily as a gift to help those who purchased assets that were overvalued in various markets? Isn’t that a recipe for inflation?

2. As for the alchemy or voodoo involved in creating money out of thin air, be comforted in the fact that new wealth is not being created in the process.

Isn’t that precisely what some people fear -- that new money is being created without offsetting new wealth? Isn’t that a classic recipe for inflation?

We believe creating money out of thin air is the only way that new money can be created and is the only way that legal paper money of the past has been created. It is a perfectly normal thing in all modern economies.

New assets in the hands of the public are not being created.

I do not understand his point -- that is precisely the problem. New money is being created -- but no new assets as far as I can tell.

Just new money in exchange for assets that are not defined as money. (huh ????) Note that he puts the words in bold type -- he seems to think his point is important. Who cares that the bonds are not defined as money? The Fed considers them money when they collect interest on them.

We think creating new money to buy old assets is a poor use for new money and is almost certainly inflationary -- unless those old assets are going to be put to a new, more productive use.

When the Fed buys government securities in the open market -- traditional open market operations -- some sellers of these securities give up assets in the form of government securities for bank deposits that are included in the definition of money. (and how is that beneficial to anyone?) It’s an exchange of assets held by the public, from assets not included in the definition of money to assets that are. (I do not see how that is of any value to anyone except the Fed who gets to collect interest on those bonds. I consider Mr. McTeer's argument completely bogus. By the way -- why doesn't the Fed create the money and give it as a gift to the U.S. -- rather than buy U.S. bonds and collect interest on those bonds? shame on them.)

If those government securities are owned by someone, those owners consider them wealth and/or assets. Creating new cash and trading that cash for an existing asset -- is a poor use of money -- and should not be defended as not being inflationary. It would be better for the Fed to create the money and pay off some of the existing national debt -- that would, at least, save us the future interest on that debt.

If a counterfeiter prints new $100 notes, new (illegitimate) money is created; and so is new (paper) wealth since the counterfeiter can spend the new notes for other things. (What is your point?) That argument is not only bogus -- it is absolutely ridiculous. It is hard to believe that a rational human being would write that counterfeiting produces wealth.

Not so with open market operations. For money, people have to exchange something of value that they earned, ultimately by production. I hope this makes some of you feel better. (I have no idea what this means or how this is related to the subject -- “creating money out of thin air”). Central bankers aren’t alchemists. -- I herewith accuse and convict you of strawmanship and contempt for the court of public opinion -- hardly anyone ever accuses the banks of alchemy -- you pulled that word out-of-thin-air