Monday, December 31, 2012

Representative Pearce is Confused

This post was printed as a letter-to-the-editor in the Albuquerque Journal North twice. First on Wednesday, Dec 26 with the title Pearce Wrong on "Printing Money" and again on Sunday, Dec 30 with the title Rep Pearce Gets Money Lesson. Either the Journal staff really liked it or, more likely, they were just confused. Thanks to the Journal for the exposure!


On the Journal's Nation page for December 22, Michael Coleman quotes Representative Pearce as saying "...we're just printing money because we can't even borrow it. Somebody needs to say this is ludicrous."

Representative Pearce's statement is shockingly ludicrous. Presumably, Pearce is referring to the Federal Reserve Bank buying US Treasury and mortgage backed securities. He and others, who refer to this action as printing money, apparently forget that the securities were purchased previously by drawing down bank reserves on the part of banks or their clients. When the Fed purchases these same securities, bank reserves are restored as the Fed takes possession of the securities. It is merely an asset swap. The net effect of the swap is that interest is paid to the Treasury instead of to the former holders of the securities in the private sector.

The second part of the quote, that we "print" this money "because we can't even borrow it" is equally ludicrous. Where does Pearce get the idea that we can't borrow money - that is, sell treasuries to the non-government sector? Even at historically low interest rates, Treasury securities are being purchased at every Treasury auction. In fact, such auctions never fail. In purchasing Treasury securities banks are just trading reserves, which earn little interest, for securities that earn more interest. It is just another asset swap.

Pearce's ludicrous statement implies that he thinks buying securities with "printed" money is equivalent to selling securities. Of course, the two operations are the opposite.  The first increases bank reserves; the other decreases reserves.

Representative Pearce's confusion is representative of the confusion of the nation's leaders. It leads to self contradictions and poor solutions to our economic problems.

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