Posted:December 17, 2025
Categories: Credit Creation, Federal Reserve, Central Bank
“By using [World War I] to suspend [gold] redeemability abroad and discourage it at home, the bank had successfully used its fiat, regulations, and monopoly control over the most important financial infrastructure in the world to finance the war effort without officially coming off the gold standard, announcing a suspension of gold redemption, or devaluing the pound. Thus was born a new science of government-sponsored financial alchemy. By controlling banks and confiscating gold, central banks could create money by fiat. By making the pound as good as gold, the new paper alchemists succeeded where Newton and the old alchemists failed. Gold could be produced at will after all. The printing press and the checking account were the alchemists’ long-sought philosopher’s stone.” Saifedean Ammous 1
About 20 years ago, I worked for a commercial bank as a commercial credit analyst. Our team was responsible for the commercial loans. My job was to analyze and review a business’s creditworthiness and to assist loan officers and the bank president in loan decisions. An interesting job, in which I learned quite a bit about bank credit creation and the inner workings of commercial banks.
This job sparked my interest in the plumbing of the monetary system. Bank credit creation is quite remarkable, almost akin to alchemy. Credit creation intensifies during the later stages of the long-term debt cycle, as I’ve written about extensively in past articles and in my book Timeless. In brief, the US is nearing the end of the long-term debt cycle, when high government debt puts our economy at risk for a debt spiral. To wit:
“Oversized government debt loads can increase government borrowing, crowding out private investment and translating into lower potential GDP growth and falling government revenue, including tax collections. In turn, this creates a higher budget deficit, leading to higher interest expenses, which in turn result in increased government debt loads. When the system reaches this point, policymakers must choose between defaulting and printing money. Since defaulting and reducing debt become painful, politicians almost always resort to money printing to expand the monetary base. This move adds credit to the system through commercial banking but also leads to currency devaluation and debt monetization, which is highly inflationary.” 2
Figure 1: The Debt Spiral
Source: Author
Red Flags
In his most recent book, economist Ray Dalio cites two major red flags during the fourth stage of the cycle:
It’s now apparent that both are beginning to occur. I’ve written at length about the first, see here and here. During the December Federal Reserve meeting, a policy shift was initiated. A decision was made to inject liquidity (money printing) into the commercial banking system through a program officially termed the Reserve Management Purchases (RMP).
The Fed initially committed to purchasing $40 billion per month from commercial banks, with the potential purchase totaling around $200 billion over five months, before scaling back to roughly $20 billion per month thereafter. This is an open-ended policy. The purchases consist primarily of Treasury Bills (securities with maturities of one year or less) rather than long-dated bonds.
Debt-Based Monetary System
So what’s going on here? Before we answer this question, let’s review how our debt-based monetary system works by studying points A through D below:
A. Figure 2: Debt-Based Monetary System
Source: Federal Reserve Bank of St. Louis
B. $5.3 Trillion = The U.S. monetary system base layer: Monetary Base (M0)4
C. $17 Trillion = The U.S. monetary system “Non-Base” money supply (M2)
The “non-base” money supply is the real alchemy. This is money loaned into existence by commercial banks. But for banks to create money, they must at least maintain sufficient reserves with the central bank (the Federal Reserve).
D. $22.3 Trillion = Total M2 Money Supply 7
By combining the monetary base (M0) and the “Non-Base” money supply of M2.
What is Money Printing?
The Fed’s fancy new acronym, “Reserve Management Purchases (RMP),” targets bank reserves. They are injecting $40 billion per month into bank reserves. With this action by the Fed, they aren’t printing physical dollar bills. Instead, they take the following actions:
Theoretically, the banks can now create more credit and money with these new reserves. Some analysts are suggesting that this isn’t actually Quantitative Easing (QE). I disagree. This is money printing. The money supply increases. This is injecting money directly into commercial banks, which in turn creates credit or money itself out of thin air when they issue loans to the public.
Conclusion
From clipping silver coins in Ancient Rome to printing paper currency in Revolutionary France during the late 1700s, to Weimar Germany’s hyperinflation in the 1920s, history clearly shows us that once you start down the path of money printing, it’s virtually impossible to stop. Back in November of 2008, there was an incredible amount of debate when Fed Chair Ben Bernanke announced the first round of quantitative easing (QE) amounting to $600 billion. However, there has been little discussion about the most recent announcement of the “open-ended” $40 billion-per-month injection into the commercial banking system. For me, this is a red flag. We’ve grown accustomed to credit creation. This degree of bank credit creation is not unique to the United States. Our money supply in the banking system is $22 trillion, but the global M2 money supply is now over $100 trillion and growing. I may sound like a broken record, but given the amount of credit creation in our world today, investors should continue to allocate to assets that preserve purchasing power in this inflationary world. The money printer is just getting warmed up.
References
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