The Global Impacts of Stopping the Money Press – Understanding Changes in Central Banking

Since the financial crisis, American banks have increased dramatically their excess reserves, the reserves they hold with the Federal Reserve over and above the minimum requirements. Excess reserves grew from USD1.9 billion in August 2008 to USD2.6 trillion in January 2015 while the assets of the Fed increased from USD0.8 trillion to USD4.5 trillion.

Many commentators who thought that this large increase of reserves would result in large inflationary pressure now fear the consequences of the end of the so called “Quantitative Easing” on the economy. Investors may have to adjust to a new reality if central banks begin to scale back their balance sheet globally.

To understand the issue, HEC Paris Affiliate Professor Philippe Henrotte, will examine the mechanism of money creation. Money creation in practice differs from some popular misconceptions, banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they “multiply up” central bank money to create new loans and deposits.

Philippe Henrotte is an Affiliate Professor in finance at HEC Paris. He is a graduate from Ecole Polytechnique Paris, he holds a DEA in Finance (advanced degree) from Paris-Dauphine University and a PhD in Finance from Stanford University, Graduate School of Business. His research interests focus on hedging and pricing of derivatives.

Professor Henrotte left the academic world from 1996 to 1998 to found and manage Russian Opportunities Fund Ltd, an open ended fund which targets the emerging markets of the CIS. Since 1999 he is founder and managing director of ITO 33, a company which produces sophisticated derivatives pricing and hedging software for banks and fund management companies. Professor Henrotte has previously also worked for Banque Rothschild et Cie, Transoptions Finance, Banque Unigestion, Banque Indosuez and Barclays Bank. From 2003 to 2008 he served as director and chief financial officer of ZAO Eurotek, an independent gas producer operating in Russia.