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How does the Fed "buy" Treasuries?

Discussion in 'Coffee Shack (Daily News/Energy/Economy)' started by Nickelless, Sep 1, 2010.



  1. Nickelless

    Nickelless If coffee is gold, I own Fort Knox Midas Member

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    I've been trying to wrap my brain around this for a while. We're seeing more and more headlines about the Fed buying Treasury debt, but what does the Fed use to buy those Treasuries? Do they just print FRNs and give that paper to the U.S. government? Or do they have some other means by which to buy Treasuries? Help me understand this.
     
  2. Meetzos

    Meetzos Gold Member Gold Chaser

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    My understanding is they do not print money, they are doing it by a few key strokes on a computer. Creating new 1's and 0's out of thin air. Supposedly that is how Ben claims they can with draw the "money" out of the system before the hyper-inflation can swallow us whole.
    That is how I grasped the picture not a 100% sure if I got it totally right.:confused:
     
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  3. Irons

    Irons Deep Sixed Mother Lode

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    I would say you got the gist of it Nick. Pretty much the same as paying your CC bill with another CC.
     
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  4. AceNZ

    AceNZ Silver Member Silver Miner

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    The Fed never creates money by printing FRNs.

    When the Fed buys Treasuries, what it does is equivalent to writing a check on a bottomless checking account. When the check (which could be wire transfer or some other equivalent) is deposited, digits appear in the seller's bank account somewhere, and an offsetting transaction appears on the Fed's books. The difference between the Fed and you and me is that they don't need anything to be in their checking account in order for it to be honored. Side note: one of the Fed's other responsibilities is to handle check clearing...

    This is analogous to the way a regular bank creates money when you take out a loan. The bank credits your account with the amount of the loan, and enters an offsetting transaction on their books; FRNs are not involved there, either, nor is anyone else's money involved.

    FRNs come into play only when a bank asks for them. Banks are required to have a "reserve account" at the Fed, which is used to hold their "reserves." Banks can use those funds to purchase an equivalent dollar value of FRNs. The Fed then asks the Treasury to print the new FRNs (which it buys from them for a few cents per note), and ships them to the requesting bank, in exchange for an equivalent amount from their reserve account. Those FRNs become "vault funds," which are also a form of reserves. The bank is then free to exchange them for a customer's money that's on deposit, even if that money came from a new loan.
     
  5. deadheadharry

    deadheadharry Seeker Seeker

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    Federal Reserve Worthless money/computer "paper" is exchanged for US Government Worthless paper/computer "money". It is all a big illusion that only exists on the indoctrination of the people and through force. Fractional Reserve Banking is immoral, in the same viewpoints as if one does "Fractional Reserve Supermarkets".... Would people agree to go to the supermarket and instead of buying milk, instead get a piece of paper that says "Here is a gallon of milk"? Of course not... Banks are giving you the paper saying "IOU real money, sometime later"... I don't want, "IOU Milk sometime later.". I want real money and I want real milk. No scams.
     
  6. phideaux

    phideaux Mother Lode Found Mother Lode

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    Gold is Money!

    Digitial bits are not worth the paper they're printed on. :biggrin:
     
  7. Weatherman

    Weatherman In GIM since 2006 Site Supporter Gold Chaser

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    Thanks AceNZ! That is the clearest explanation I have read. People who think the FED cannot "create" fiat equivalents and pump them into the economy are missing the big picture. The only questions are how much fiat the FED will create, and how quickly will that fiat flow into the economy. When you can tell us those answers, then we can better guess at how fast prices will rise in the future.
     
  8. phideaux

    phideaux Mother Lode Found Mother Lode

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    Meanwhile, back on the ranch, Gold is back above $1,250.
     
  9. simesstein

    simesstein New Member

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    I'd say it this way -- and please correct me if I get it wrong since I'm no economist.
    If the Fed repurchased 100% of the Treasury's debt, that would replace trillions in Fed IOU notes with trillions of cash (i.e. computer entries representing cash, not greenbacks).
    The government would no longer owe anybody but the Fed (i.e. itself) anything.
    The existence of those trillions of dollars in new money would presumably stimulate the economy as all that liquidity (or a lot of it at least) would get spent on things.
    But the existence of those trillions of dollars would also cheapen the value of each individual dollar, resulting in inflation --
    all that money lying around would just mean that more and more people seek out limited goods, and bid the prices up.
    I believe that's a pretty straightforward way of explaining this process.
    Another person likened it to the way bank's create money -- but I'm not sure that's the same thing, really.
    What's going on with banks is that one bank collects deposits and holds cash (again, think computer entry, not greenbacks).
    The regulators won't let banks lend out 100% of their deposits, but 80% is fine.
    Then the bank gives 80% of the cash to a borrower, and receives an IOU from that borrower instead (replacing one asset with another asset).
    Then, the borrower puts the money into his bank, creating a new bank deposit.
    Or he buys equipment and the equipment manufacturer puts the money in a bank deposit.
    Etc.
    Now, the original $1.00 of deposits has miraculously created another $0.80 of deposits.
    If that bank lends out 80% of their 80 cents, that's another 64 cents that becomes a deposit.
    Deposits are cash, so the process of lending increases the money supply.
    But it does that by increasing IOU's in the system too.
    When the Fed buys government debt, it is reducing the number of IOU's in the system.
    So, it's not really the same process, though both activities (Fed buying government debt and banks lending money) certainly do increase the money supply.
     

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