The Fed is Buying Treasurys
It's time for a rare politics-related post on my blog.
In an unprecendented move[*], the United States Federal Reserve is now buying US Treasury government bonds (source 1, source 2). The debt issued by the US government is being bought by the US Federal Reserve. Instead of lending money from others, the government is printing money to finance its spending. Printing money could massively devalue the dollar in the long term.
Where's the outrage? The New York Times mentions this program in a single paragraph, even though we're talking $300 billion, almost half as much as the hotly contested stimulus from earlier this year. My sense is that the Fed chose a good news day to launch its initiative - with all the global news, this probably didn't have time to sink in.
[*] Update: Actually, this has happened once more than 50 years ago, but for a different reason.
In an unprecendented move[*], the United States Federal Reserve is now buying US Treasury government bonds (source 1, source 2). The debt issued by the US government is being bought by the US Federal Reserve. Instead of lending money from others, the government is printing money to finance its spending. Printing money could massively devalue the dollar in the long term.
Where's the outrage? The New York Times mentions this program in a single paragraph, even though we're talking $300 billion, almost half as much as the hotly contested stimulus from earlier this year. My sense is that the Fed chose a good news day to launch its initiative - with all the global news, this probably didn't have time to sink in.
[*] Update: Actually, this has happened once more than 50 years ago, but for a different reason.
Labels: economics
9 Comments:
"instead of lending money from others, the government is printing money."
That's how it has been even since Nixon abandoned the Gold standard right? The Govt can/was/is printing money out of thin air, causing inflation, devaluing the currencies, eroding the savings of people etc etc right? what's new?
The US government has to finance everything it does either through taxes or by loaning money from others.
The US government can't issue new money to finance their undertakings.
Only the Fed can issue new money, but it's not supposed to just give the gvmt the money it wants.
Normally, the US government loans money from China or individuals. But those aren't giving the US money anymore. Instead, the Fed is printing new money and handing it to the government.
What difference it makes (to citizens) whether the FED prints money out of thin air or the Govt prints money out of thin air. As long as the unit that prints money can print currency that is not backed by anything solid, the effects (inflation) are the same right?
The Fed isn't directly controlled by the gvmt. It's a fairly independent entity.
Normally, the loans are backed by something "solid" - real money lent by real people. In this case, it's just new money created by the Fed.
I have never fully understood how exactly they decide how much money to print and when. But sure, this is something that needs an outrage.
The fed bought treasuries during the great depression, and also during the 1960s.
During the 1960s, it bought Treasurys in an effort reduce long-term interest rates while allowing short term rates to rise. Not because people weren't lending to the US anymore.
What's your source the buying Treasurys during the Great Depression?
Maybe a more extreme example would help clarify why this is bad.
The Fed could decide tomorrow to purchase $11 trillion of Treasuries. This happens to be the federal deficit, and the US would essentially be debt-free. Not quite, because the Fed would own all of its debt: the interest payments would go to the Fed. Fed profits are returned to the Treasury, thus neutralizing the interest burden.
However, this action would have released $11 trillion into the world - a vast oversupply of money, but with the same supply of goods and services. This would drastically reduce the value of the dollar.
Ray Dalio, founder of Bridgewater: "So you will see the Federal Reserve buy long-term Treasury bonds, as it did in the Great Depression."
http://online.barrons.com/article/SB123396545910358867.html?page=sp
Great article and definitely worth reading.
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