You’ve likely stumbled upon the infamous “Printer Meme” online. It usually features a depiction of the Federal Reserve, often represented by figures like Jerome Powell, cranking out cash from a money printer, implying rampant money creation and impending hyperinflation. Memes, especially those poking fun at complex topics, can be entertaining. However, this particular meme is often used to propagate misunderstandings about how the economy and the Federal Reserve actually function. While the “printer meme” might be humorous, it’s crucial to understand the reality behind it. Let’s debunk the myth and explore why this meme, though popular, misrepresents the role of the Fed.
Problem #1: Jerome Powell Doesn’t Control the Cash Printer
The most immediate flaw in the “printer meme” is its literal interpretation. The meme depicts Jerome Powell, or the Federal Reserve, directly printing physical cash. However, the reality is far more nuanced. While Federal Reserve Notes are indeed the cash in your wallet, their circulation isn’t directly controlled by the Fed’s monetary policy in the way the meme suggests.
Think of it this way: commercial banks are the primary players in cash circulation. Banks create deposits, and customers can then withdraw portions of these deposits as cash. When a bank needs physical cash to meet customer demand, it turns to its regional Federal Reserve Bank. The Fed then requests the US Treasury to print the physical banknotes and sells them to the Fed at cost. The commercial bank then exchanges reserves for this physical cash from the Fed.
This entire process essentially facilitates a conversion of an existing digital deposit into physical cash for a bank customer. Crucially, this isn’t new money creation. The deposit already existed. When a customer withdraws cash, their deposit balance decreases, and their cash holdings increase. The total amount of money remains largely unchanged; the Fed has simply facilitated a change in the form of money, not its quantity. Jerome Powell’s direct involvement in “printing cash” in this scenario is minimal to non-existent.
Related: Where Does Cash Come From?
Problem #2: The Fed’s “Money Printer” is Misunderstood as Quantitative Easing (QE)
The “printer meme” often alludes to Quantitative Easing (QE), the unconventional monetary policy used by central banks to stimulate the economy. Many interpret QE as the Fed simply “printing money” and injecting it into the economy. This is a significant oversimplification.
The Federal Reserve primarily functions as a clearinghouse for banks, facilitating interbank payments. Actions like adjusting interest rates and implementing QE are secondary to this core function. QE involves the Fed purchasing assets, typically government bonds (like Treasury bonds), from commercial banks.
When the Fed buys a Treasury bond from a bank, the bank receives cash reserves in exchange, and the Fed acquires the bond. While this technically increases the amount of reserves in the banking system – often referred to as “money” in a narrow sense – it’s more accurately described as an asset swap. The bank exchanges an interest-earning asset (the T-bond) for reserves, which may earn a lower interest rate.
This is why many economists argue that QE is not true “money printing” in the inflationary sense depicted by the meme. For every dollar “printed” (in the form of reserves), an equivalent value of assets (T-bonds) is removed from the private sector’s balance sheet. The overall impact on the quantity of net financial assets held by the private sector is debatable. The primary effect is altering the composition of assets held by banks, not necessarily drastically increasing the overall money supply in a way that automatically leads to inflation.
Related: Understanding Quantitative Easing
Problem #3: The Fed Doesn’t Directly Fund Fiscal Policy and Government Spending
A common argument linked to the “printer meme” is that the Fed “funds” government spending through QE, enabling fiscal policy and massive government expenditure. This perspective incorrectly conflates monetary and fiscal policy.
Fiscal policy, which involves government spending and taxation, does expand the balance sheet in a meaningful way. When the US Treasury spends money, it often issues new Treasury bonds to finance that spending. This issuance of bonds could be considered “bond printing” and is more closely aligned with the meme’s implication of increasing government liabilities.
However, it’s crucial to understand the flow of funds. The Treasury spends and then funds this spending by selling bonds. The Fed’s QE operations are a separate action, occurring after the fiscal policy decisions are made. The Treasury determines the quantity of government debt and assets through fiscal policy, while the Fed, through QE, primarily influences the composition of assets in the financial system.
While expansionary fiscal policy can be inflationary, the Fed’s role in purchasing government bonds through QE is not the primary driver enabling government spending. The government’s ability to spend is more fundamentally constrained by factors like inflation and overall economic conditions, not solely by the Fed’s bond-buying programs. Low interest rates are often attributed to Fed actions, but they can also be a reflection of broader economic conditions, such as low inflation and global savings gluts, independent of QE.
Problem #4: The “Printer Meme” Overstates the Fed’s Power
Ultimately, the “printer meme” errs by attributing an exaggerated and misleading level of power to the Federal Reserve. While the Fed is undoubtedly a powerful institution capable of influencing the economy, its powers are not as unfettered or direct as the meme suggests.
The meme implies that the Fed can simply “print money” at will and directly control inflation or the economy through this action. However, as discussed, the Fed’s actions are more complex and operate through various channels. The US Treasury, through fiscal policy, has a more direct role in government spending and debt issuance, which are closer to the “money printing” concept in the meme. The Fed’s tools, like QE and interest rate adjustments, are more about managing financial conditions and influencing the composition of assets within the economy.
While the Fed could theoretically take actions that could lead to inflation, the traditional understanding of the Fed as simply turning on a “money printer” is a gross oversimplification. The “printer meme,” while catchy, fosters a misunderstanding of the actual mechanisms of monetary policy and the limitations of the Federal Reserve’s power. It’s important to look beyond the meme and understand the complexities of how the Fed and the financial system truly operate.
¹ – Monetary Policy has many transmission mechanisms so I don’t want you to think that QE or other policies do nothing. But the general description of these operations in the media are much more complex than we are often led to believe.
² – Certain Fed lending programs are properly thought of as “money printing” in the sense that they’re balance sheet expansions that generally help the private sector maintain a higher balance sheet level than they might otherwise experience. For instance, many of the bank lending programs coming out of 2008 helped banks survive in an environment they might not have otherwise been able to survive.
³ – An example of this would be yield curve control. The implementation of yield curve control on the long end of the curve would be a clear indication that the government feels that it must pin long-term rates lower than they otherwise would be, in order to fund government spending.
Cullen Roche
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
