[Ben2]

""When anyone other than the Fed buys Treasuries, they lend part of the existing circulating money supply to the USG, so there is no increase in the circulating money supply. When the Fed buys Treasuries, they increase the circulating money supply. But notice that the Fed simply created base money, not credit money, and I said that base money is not part of "the circulating money supply", right? So who created new money supply? The answer is that the USG did when it spent the money it received by selling Treasuries to the Fed. So the Fed created new base money and the USG created new credit money when it spent it, and the credit money is what increased the circulating money supply, not the base money which we see as "excess reserves held at the Fed."

The standard argument for why QE is not inflationary is that they point to these excess reserves and say, "look, they're just sitting there piling up. No one is spending them so it's not inflationary, it's just an asset swap between the primary dealer banks and the Fed. They are swapping one asset, Treasuries, for another asset, base money, which just sits there like the Treasury otherwise would have, so there's no need to be concerned." But the flaw in this reasoning, what they miss, is that newly issued Treasuries directly represent USG spending.

When the USG spends, it credits someone's private account at some bank. That credit either came from someone other than the Fed who bought a Treasury, or it came from someone who paid their taxes, or it was created from thin air by the simple act of the USG writing a check. It is the latter that is inflationary because it increased the circulating money supply. The first two options do not increase the circulating money supply because a credit money unit simply passes through the USG, from either a lender or a taxpayer. In the third option, the Fed enabled the USG to create brand new credit money by issuing a new base money unit to go with it. The base money unit goes to the commercial bank that took the check issued by the USG. It goes into that bank's reserves while the bank issues a new liability to the government stooge that got paid.

When a commercial bank takes a deposit, that deposit becomes a liability to the bank. So the bank has to receive something in return for expanding its liabilities. In this case there is no credit money unit coming from a lender or taxpayer, so the stooge's deposit is a brand new liability in the commercial banking system. It is created by the simple act of the USG spending a credit unit without taking one in. But the commercial bank is fine with creating this new liability because it got a new reserve unit to go with it. And it's those reserve units we see piling up in the excess reserves held at the Fed.""