Paulie
Diamond Member
- May 19, 2007
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You're kidding me, right? the Fed can do exactly that , it's called monetization of debt the FOMC does it by buying debt instruments on the open market for cash, this results directly in increasing the money supply in circulation.The Federal Reserve can NOT put money into circulation.
You are severely misinformed, my friend.
The Fed uses open market operations (treasury purchases and sales) to increase or decrease bank reserves. Those bank reserve increases are not inflationary in and of themselves until that money is then released into the economy by the participating member banks, either through lending, investing, or withdrawals.
This is the same for the purchase of debt instruments, such as MBS's. The Fed buys those debt instruments with newly created money, but it can not force those institutions it bought them from to lend that money, therefore it has no power to directly increase the amount of money in circulation.
For instance, when it bought ~80 billion of AIG debt, it injected liquidity into AIG, but it can not force AIG to lend that money to customers, or invest it. That money was meant to stablize AIG's balance sheet.
The fed can use tools to dissuade banks from lending, however, by SELLING securities and removing money on deposit in its member banks' reserves.
Just so we're clear, I'm not defending the Fed. I disagree with their mere existance, let alone anything they've been doing for the past year ESPECIALLY. I just want people to understand that the Fed can not simply increase the amount of money in circulation directly, at will. It can only add money to an institution's balance sheet. Whether that institution ever puts that money into circulation in any of several ways, is entirely out of the Fed's control.
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