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You will likely find it hard to believe that the government, through the Federal Reserve, is actually able to create money out of thin air. This concept has been referred to in the ancient and medieval world as ex nihilo, or out of nothing.

This creation of money from nothing is not only possible today, but it is a commonly accepted and pursued policy.

Listen to the words of Federal Reserve Bank Chairman Benjamin Bernake, if you doubt the truth of this statement. He said in 2002 that the United States government possesses a modern day technology of an electronic equivalent to the printing press that permits it to create all of the U.S. dollars that it wants.

He made later statements about this printing of money that earned him the nickname of Helicopter Ben, when he claimed that if the U.S. economy ever ran into real difficulties, then he could salvage it if he only had a large enough helicopter to fly around the country throwing out bales of this money that was created out of nothing to the citizens.

Bernake is a professor whose specialty dealt with the Great Depression. His statements regarding the country’s capability of electronically printing money from thin air may be controversial. You will see below that the truth is that they have evolved into a main component of the American economy in the twenty-first century.

You have to comprehend how modern money works in order to internalize how a modern day electronic printing press is able to make money from nothing. The actual currency of the U.S. does not prove to be the Federal Reserve dollars that move around the United States and its economy. Instead, the real currency turns out to be Treasury bonds and bills that are backed up by faith and credit of the government.

People, investors, and countries who hold these U.S. Treasuries receive the only guarantee of being paid by the government from taxes that will be collected from American citizens in the future. This guarantee to treasury holders is what really underlies what you use as money in the form of dollar bills.

Fortunately for the U.S. government, the U.S. treasuries’ market remains the deepest and most liquid on earth. This makes it easy for the Fed and the government to conjure new dollars out of thin air. The Fed does this by simply monetizing the debt of the government. In other words, the Fed will step into the open markets and purchase Treasuries.

When they do this, they do not pay with real dollars to the seller of the Treasuries. Instead, they simply credit the account of the seller for the action. This proves to be Bernake’s electronic equivalent that he had mentioned in his earlier speech. You are right to think that the value credited to the account of the seller does not literally exist. It is merely an on screen balance of the bank’s reserves with the Fed.

With these actions of monetizing the debt, the Federal Reserve has actually printed money from nothing. They are able to do this so long as the Treasuries market remains so deep and liquid.

The transaction also requires sufficient confidence to be present that the seller will accept the crediting of its account by the Federal Reserve. Until either of these two underlying pinnacles is called into question, then the Federal Reserve and the government will continue to have the ability to literally create money electronically out of nothing through monetizing the government’s debt.

You may be asking yourself a good question now. If the government creates money from thin air, would this not affect the value of the entire dollar money supply, both that already exists and that they are creating? The answer to the question is a resounding yes. Later in this chapter you will see start to see how this magical printing of money actually has negative consequences for the demand and value of the U.S. dollar.