The truth behind the Federal Reserve's bond issuance: Why is printing money so "troublesome"?

Have you ever wondered, if the Federal Reserve can print money infinitely, why does the US government still go through the trouble of issuing bonds? This question seems simple on the surface but actually hides the deep logic behind economic operations.

The Chair of the White House Council of Economic Advisers once tried to explain the bond mechanism publicly, only to leave many more confused. Indeed, these concepts are not easy to grasp. However, if we start from the basics, we can see the true face behind this financial “puzzle.”

Three Levels of Money Supply

To understand why the Federal Reserve issues bonds instead of directly printing money, we first need to understand how the modern monetary system works.

Base Money (M0) is cash in circulation plus bank reserves. But banks do not keep all their money in vaults; they estimate how much liquidity to retain based on risk analysis, and the rest exists electronically—that is, in the digital figures in your bank account.

Narrow Money (M1) includes M0 plus demand deposits and traveler’s checks. This is the money people can use immediately.

Broad Money (M2) encompasses M1, money market savings deposits, and time deposits under $100,000. It represents all readily accessible funds.

Looking at the historical data of M1 and M2, you’ll notice a prominent growth curve in 2020. Yes, that is the result of the Federal Reserve’s large-scale money printing during the pandemic.

Cantillon Effect: Newly Printed Money Is Not Distributed Equally

But here’s a key issue: the new money does not flow to everyone at the same time.

18th-century economist Richard Cantillon discovered this phenomenon—those who first receive the new funds (banks, governments, financial institutions) benefit the most, while ordinary people experience benefits with a delay. This is known as the Cantillon Effect.

The newly printed money first flows into the financial system, then gradually permeates into individual accounts. During this period, asset prices have already risen, and ordinary people can only buy at higher prices.

Why Issue Bonds? The Current State of US Treasury Bonds

The problem facing the US government is simple: expenditures exceed tax revenues, creating a deficit. To fill this gap, the government must borrow money.

As of now, the US public debt has reached $34.6 trillion. You might wonder, who is buying all these bonds?

The answer is broad: individual investors hold them in IRAs and 401(k)s, institutions hold them indirectly through mutual funds and money market funds, the US banking system holds them, foreign central banks (Japan, China, etc.) hold them, and the Federal Reserve itself holds a large amount.

Quantitative Easing: The Fed’s “Money Printing Machine”

Now we arrive at the crucial part—how exactly does the Federal Reserve “print money”?

This involves two operations: Quantitative Easing (QE) and Quantitative Tightening (QT). When the economy is in crisis, the Fed uses QE to buy large quantities of government bonds and mortgage-backed securities. QT is the process of selling these assets.

During the 2008 global financial crisis, the Fed purchased over $1.5 trillion of such assets within a few years. By 2020, when the pandemic hit, the Fed’s “firepower” was even greater—adding over $5 trillion in just two years.

How is this achieved? The answer lies in the Fed’s unique power as a central bank—it can create bank reserves out of thin air. The process is as follows:

The Fed announces a purchase plan → Primary dealers (large intermediary banks) execute the purchases → The Fed creates new money credited to reserve accounts → The newly created money flows to bond sellers → Increased liquidity enters the banking system.

Imagine a Monopoly game where all the money has been distributed, and a new player joins with extra cash. He buys properties, causing prices to rise. The Fed’s QE is similar—injecting previously nonexistent money into the financial system, expanding the money supply, and causing asset prices to soar.

Looking at the relationship between the M2 money supply curve and the Fed’s balance sheet, both rise in tandem—this is the real picture of “money printing.”

Why Use a Roundabout Way of Issuing Bonds Instead of Directly Printing Money?

If the Fed wanted, it could skip the bond system altogether and directly print money to support government spending. But what would be the consequences?

Imagine a world where Congress spends as much as it wants, and the Fed prints as much money as needed. Unrestrained, infinitely expanding, blatant money issuance.

The money supply would explode, and prices would rise exponentially. People would lose confidence in the dollar as a store of value, and eventually, even the medium of exchange would be compromised. Streets would be piled with dollars because buying anything would require a cart, and prices would change every minute.

(If you don’t believe it, look at the current situations in Venezuela or Lebanon.)

This would lead to hyperinflation, the collapse of the dollar system, and economic chaos.

Bond Issuance System: A Smokescreen for Controlling Inflation

Therefore, the Fed and the Treasury have chosen a much more complex route—issuing government bonds.

This approach has several benefits:

• By financing the market rather than directly printing money, it creates an illusion of “restraint.”
• It prolongs the entry of new money into the system, easing inflation shocks.
• It maintains public confidence in the dollar and preserves the stability of the monetary system.

Even when necessary, the Fed can buy back its own country’s bonds, effectively printing money, while maintaining a nominal “cautious” appearance.

When even the chief economic adviser of the country has only a partial understanding of this system, it becomes even harder for ordinary people to see the full picture. This is also why this show can continue to this day—its complexity itself is the best cover.