Fed, worried about recovery, will buy US debt

http://finance.yahoo.com/news/Fed-worried-about-recovery-apf-2353655020.html?x=0

by startuprules • 16 years ago

21 59 16 years ago

finance.yahoo.com

startuprules16• 16 years ago

massive printing of dollars, here we go!

gte910h2• 16 years ago

Cause that's really dangerous when you're suffering deflation....you know, when you take actions to correct this situation.

startuprules16• 16 years ago

dangerous only for the banks.

fuzzmeister• 16 years ago

"The decision to buy government debt, using proceeds from Fed investments in mortgage bonds..."

If the money is coming from mortgage investments, I don't believe this action is actually increasing the money supply. Knowing the complexities of the Fed, though, I could certainly be wrong.

ww5203• 16 years ago

Does this mean the foreigners have lost faith in the US government and stop buying the US debt? The Fed buying US debt is like the left hand buying from the right hand.

mechanical_fish3• 16 years ago

No, I believe it has almost nothing to do with foreign investment. (Incidentally, foreigners have awesome faith in the US government, as evidenced by the fact that interest rates are as low as they have ever been, and -- frighteningly -- perhaps as low as they can be.)

No, the government buying its own debt is a very famous accounting trick designed to create more money in the economy. This act is the basis of the fractional reserve system, which in turn is the basis of all modern money.

The Federal Reserve bank buys bonds from bondholders (either newly issued bonds from the government or bonds from my safe deposit box). And in return it puts money in a bank account. Where does the money come from? It is just numbers in a database. The Fed just edits the database. Only the central government, which controls the currency, has the power to create money out of thin air in this way, but that power is very important.

(In other times, when the economy is really hot and inflation is soaring and we need to cool down, the Fed does the opposite: It raises interest rates, which causes people to want to buy bonds to get more interest, which causes people to spend their cash for those bonds. And, as each bond is bought, the Fed just erases the cash from bank accounts. The money vanishes! Remember, money is just a score in a game, the game of "keeping the economy working so that people can eat". It's not made of metal or anything. That was the old way, the way that didn't work.)

You can't get the same effect by selling bonds to England, because then England will pay for the bonds in dollars, and England can't create dollars. They have to buy dollars with pounds. So the total supply of dollars in the world would remain constant, which is not the point of this exercise.

(Now if I really understood econ we could go on to talk about why this little exercise might not work this time, about the "liquidity trap" and the "zero lower bound". But my time is up.)

yummyfajitas4• 16 years ago

(Incidentally, foreigners have awesome faith in the US government,...

This could also reflect a lack of faith in other governments rather than faith in the US government. If assorted European debt became 10x more risky but US debt only became 5x more risky, that would cause a flight into US debt.

jeromec3• 16 years ago

This is a great explanation. Correct me if I'm wrong, but there is an important detail to note, which is the money supply is not being expanded significantly more in this action by the Fed any more than the normal course unless there is newly issued bonds/govt. debt. The problem is the govt. is reluctant to take on more debt, even though stimulus would be welcomed, because deficit worries persist. This Fed move will really seek to push down interest rates a bit more, by creating more demand for existing bonds. Unfortunately, these record low interest rates are not speeding economic recovery, and the money supply is not expanding (inflationary) as we would like, because banks are still hesitant to lend.

anamax• 16 years ago

> Incidentally, foreigners have awesome faith in the US government, as evidenced by the fact that interest rates are as low as they have ever been, and -- frighteningly -- perhaps as low as they can be.

Interest rates reflect relative opportunities, not absolute value.

The fact that the US is seen as a better investment than, say, China, does not tell you that the US is a good investment.

> "zero lower bound".

0 is not a lower bound for interest rates. You can loan someone $100 today in return for $90 in ten years.

If you're trying to get folks to do something with the money that they borrowed, there are other levers. Or, you could just loan it to different people.

thewileyone• 16 years ago

Yes, buying its own debt is basically license to print money. Which will lead to inflation because China isn't going to buy US bonds/debt anymore, which leads to more printing money ... and so on and so forth.

MichaelSalib2• 16 years ago

Given that we're already experiencing zero or negative growth, inflation seems like a really good idea, especially since the Fed can stop anytime it wants and begin raising rates.

By the way, this is not just my opinion. Conservative economist Tyler Cowen (who teaches at GMU) also thinks that a little inflation would be helpful: http://www.nytimes.com/2009/08/02/business/economy/02view.ht...

stretchwithme3• 16 years ago

i suppose it makes more sense to print money and lend it to itself than lending it to banks to lend to itself

startuprules16• 16 years ago

Why waste all that paper/electronic bits? Just enact a large tax increase...it's the same thing. Oh, but then the American sheeples will notice.

startuprules16• 16 years ago

The US government is printing/robbing you of your savings. Don't believe it for a second it will trickle down to you; the last batch of printing/bailout went to banks and shareholders.

On a side note, man, there's alot of sheeples on this board. Do you all like get up early in the morning to go to work and get robbed?

dstein• 16 years ago

It's the financial equivalent of eating your own poop.

mortenjorck• 16 years ago

Does this give the Fed more influence over treasury note yields? If it were to start buying in higher volume, I would think so.

Fed, worried about recovery, will buy US debt

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