Darin, the Fed creates it, out of thin air. the method of injecting it into the market is by buying government paper from financial institutions, in either permanent reserve additions (a.k.a. coupon passes, essentially a monetization of govt. debt) or temporary repo's (repurchase agreements, whereby the institution has to buy the paper back within a specified period...however, repos that run out, are customarily replaced with new, bigger repos). once liquidity is thus injected, the fractional reserve system guarantees it will multiply throughout the system.
e.g, Fed does coupon pass for $1bn. - $1 bn. is now in the system as additional liquidity. A now borrows $900m. of this new money (10% having to be kept as the fractional reserve) and deposits the money with his bank, which now can lend $810 m. to B, who deposits the money in his bank, which now can lend out 729m. to C, etc., etc..... |
