Nick Giambruno here, filling in for Dan Steinhart. Some of you may know me as the editor of Doug Casey’s International Man.

Getting right into it, today we have an exclusive, thought-provoking piece that will likely challenge some of your deepest-held assumptions on a topic of much debate: money printing and inflation.

Before I poke this hornet’s nest, however, let me first reveal why I am doing this. I believe – as do all of us at Casey Research – that it is critically important to listen to well-reasoned arguments that may not conform to one’s beliefs. Doing so serves as a sort of “sanity check,” helping one to reassess and maybe adjust one’s ideas. It helps us form stronger opinions and arguments. And most important, it helps us make better investment decisions.

After all, you can’t be sure your long-held convictions are still valid unless you regularly challenge them.

One such deeply held assumption that is shared by many Casey Researchers (including myself) and readers is that the massive creation of new currency units by the Fed will eventually cause significant price inflation.

Perhaps there is nobody better to challenge that assumption than Dr. Lacy Hunt, someone you would normally be more comfortable agreeing with.

In case you are not familiar with Dr. Hunt, he is an author and internationally known economist who has previously worked as a senior economist for the Federal Reserve Bank of Dallas. His work has appeared in Barron’s, the Wall Street Journal, and the New York Times, among other publications; and he is often a favorite speaker at Casey Research conferences.

Speaking of Casey conferences, you won’t want to miss his appearance, along with Dr. Ron Paul and many other exciting speakers, at the upcoming Casey Summit in Tucson, Arizona from October 4-6. Get all the details and register today.

To set the stage for the article that Dr. Hunt has written for us, I would highly suggest you first read Hoisington’s Quarterly Review and Outlook for the first quarter of 2013 to get a more comprehensive understanding of his arguments. You will also get some background and down-to-earth explanations of some of the must-know terms (M2, the monetary base, the money multiplier, velocity, etc.), which are necessary to be able to better understand the debate around the Fed and inflation.

The piece took me by surprise with this opening quote:

“The Federal Reserve is printing money.” No statement could be less truthful. The Federal Reserve (Fed) is not, and has not been, “printing money.”


That statement, coming from a very smart guy like Dr. Hunt, took me by surprise and intrigued me to see how he logically came to his conclusions.

He goes on to explain, using data to back up his argument, why he thinks it is a broad misconception that the Fed is “printing money” and that the Fed doesn’t really have control over growth in the money supply.

There is no disagreement that the Fed controls the monetary base, though it is important to distinguish the difference between the “monetary base” and the “money supply.”

The monetary base increases when the Fed buys government securities (like in the various QE programs). This process creates currency units in the form of bank reserves that have the potential to be loaned out. However, this does not translate into an increase in the money supply until these new bank reserves are actually loaned out.

One of the main points of this debate centers on whether or not the Fed controls the money supply.

Dr. Hunt’s camp would claim that the Fed does not control the money supply, but rather banks and their customers control it since their actions are the ones that determine whether the new bank reserves created by the Fed get loaned out and added to the money supply.

Others would argue that the Fed does indeed control the money supply. They point to the fact that since the beginning of the financial crisis, the Fed has taken steps to pay relatively higher interest on the reserves that commercial banks keep on deposit with the Fed. Remember, it is these reserves that are created when the Fed buys government securities, but which don’t become part of the money supply until they are loaned out by the banks. By paying the banks a relatively high interest rate on these reserves, it is argued that the Fed is in fact controlling the money supply. This is because the Fed is providing an incentive to the banks (by offering them relatively high interest rates) to keep this cash on reserve and not loan it out – because if loaned out, it would cause an increase in the money supply.

Both sides have merit and present logical cases.

It is likely that many readers (like myself) will find their deeply held views on the Fed and inflation challenged by Dr. Hunt’s well-reasoned arguments. With that, I will turn you over to Lacy.

Hope you enjoy the article. Dan will be back next week!

Nick Giambruno
Editor, International Man