I do not have a problem with any of the following:
Reserves and money supply: Probably not what you learned in school
One cannot think straight about the future impact of different exit strategies without understanding of the role of bank reserves in today's financial markets.
- Banking and money creation has not worked for at least two decades in the way that most people learned in school.
The old system was rather simple in the textbooks. The basic assumptions were (i) all credit was provided by banks; (ii) all bank credit (assets) were funded by the issuance, or creation, of depository liabilities (money) subject to a reserve requirement; and (iii) central banks controlled credit/money/inflation by rationing bank reserves. A stable 'money multiplier' was hypothesised to allow central banks to accurately predict the eventual impact of changes in bank reserves on money and credit.
The problem with the old theory of monetary operations is that none of the three assumptions has been true for at least a generation.
Most credit in the US is created by nonbanks; virtually all bank lending is funded by the creation of liabilities that are not subject to reserve requirements,3 and central banks do not ration reserves. In fact they take great pains to provide banks with the amount of reserves they desire. Central banks influence credit not by rationing the quantity of reserves but by altering the interest rate that banks must pay to obtain the quantity of reserves they desire.
Rather than saying it doesn't exist at all, Peter Stella explained how the system has morphed away from the "stable" system description, which is fine with me. I just don't want people being misled that there are no reserve requirements in the US, even if they are only required after the fact, after the loans have been made. I don't want them to falsely imagine that all loans must be made against borrowing from the Fed rather than also against demand and time deposits at the lending banks, which deposits are the result of loans created under the required reserve ratio and sans lending from the Fed. The money does multiply in the old-fashion way even while it is also created in all the newer ways described by Peter Stella.