Toro
Diamond Member
But it strengthens the dollar instead of debasing it.
The Fed buying Treasury debt is de facto monetization and weakens the dollar because it is increasing the money supply.
You know I never quite understood that.
Here's why...T-bills are valued as money.
Banks holding them count them as money.
Based on their holdings banks lend money (which increases the money supply directly, too).
I mean I understand that the number of greenbacks in circulation will increase as the FED purchases T-bills, of course.
But as the dollar is just another promise to pay (and is valued according to the market's willingness to take them) so too are T-bills just another promise to pay and valued according to the markets willingness to take them.
You see why I am confused here?
What am I missing?
A couple things.
First, T-bills are claims on the US government, no different than a bond is a claim on the assets of a company, except of course that the government can create Tbills indefinitely if they are monetized by the Fed. Think of it terms of extremes. If the Treasury created $1,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 worth of claims and it was all sold to the Fed, the supply of money would explode.
Second, money isn't just what the government creates. It is also what the private sector creates. Money creation in the private sector is a function of what the government does to a large extent, whether that is keyed off interest rates set by government, laws set by government, confidence in government, etc. But money creation is also a function of the general level of confidence, investment opportunities, leverage, etc. It is intertwined. So when the government does something, it affects how much money will also be created in the private sector.