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I'm trying to learn about the process of money creation, and I'm not quite getting this.
Perhaps someone could point me toward a good book about it?
I'm trying to learn about the process of money creation, and I'm not quite getting this.
Perhaps someone could point me toward a good book about it?
The national debt is a burden on future generations.
This is based on the false premise that the national debt must be paid off by the private sector some day. In reality, the government itself pays to redeem its debt securities as they mature, using funds obtained by selling new securities to the public. This "rolling over" of the national debt can be continued indefinitely, since the government can pay whatever interest rate the market demands for its securities.
This one is a big one for misconception on USMB by RWer's
The national debt is a burden on future generations.
This is based on the false premise that the national debt must be paid off by the private sector some day. In reality, the government itself pays to redeem its debt securities as they mature, using funds obtained by selling new securities to the public. This "rolling over" of the national debt can be continued indefinitely, since the government can pay whatever interest rate the market demands for its securities.
Some Common Misconceptions
That sounds about right from what I've been reading, but what I'm particularly curious about right now is whether The Fed tends to gain or lose on these trades. Does it buy securities at a premium or a loss? Surely the securities would not be placed on the market if they were expected to not profit.
Since The Fed has incentive to trade other than profit, wouldn't this place it in a weakened bargaining position? (i.e. more likely to take a minor loss to meet it's goals of inflation or deflation)
This one is a big one for misconception on USMB by RWer's
The national debt is a burden on future generations.
This is based on the false premise that the national debt must be paid off by the private sector some day. In reality, the government itself pays to redeem its debt securities as they mature, using funds obtained by selling new securities to the public. This "rolling over" of the national debt can be continued indefinitely, since the government can pay whatever interest rate the market demands for its securities.
Some Common Misconceptions
economist.com news...
what-happens-when-fed-starts-losing-money-other-side-qe
Don't quite get it all, but its relevent.
Well....there's some half truths in the article.
First of all, QE is an asset swap, not money printing. All the FED really does is buy Treasuries and sells the dollars it creates. After this asset swap happens, the primary dealer that sold the Treasuries to the Federal Reserve now has cash as opposed to bonds, and the Federal Reserve now has Treasuries as opposed to cash.
In other words, QE is a change in the overall asset composition of government sector liabilities (and term structure). There isn't an increase in non-government net financial assets.
That sounds about right from what I've been reading, but what I'm particularly curious about right now is whether The Fed tends to gain or lose on these trades. Does it buy securities at a premium or a loss? Surely the securities would not be placed on the market if they were expected to not profit.
Since The Fed has incentive to trade other than profit, wouldn't this place it in a weakened bargaining position? (i.e. more likely to take a minor loss to meet it's goals of inflation or deflation)
Gain or loss on OMO is incidental to the implementation of monetary policy, but the Fed has been making $70-60 billion profit a month lately. Like all Fed revenues, after expenses are paid, the gain is remitted to the US Treasury.
Nice job. I only wish I could have put it so succinctly. Now, if people would try to understand instead of throw rocks, we could actually have a DISCUSSION occurring in the reality based world. Instead, I fear, we are likely to simply see more agenda driven efforts to put an end to this rational discussion.Well....there's some half truths in the article.
First of all, QE is an asset swap, not money printing. All the FED really does is buy Treasuries and sells the dollars it creates. After this asset swap happens, the primary dealer that sold the Treasuries to the Federal Reserve now has cash as opposed to bonds, and the Federal Reserve now has Treasuries as opposed to cash.
In other words, QE is a change in the overall asset composition of government sector liabilities (and term structure). There isn't an increase in non-government net financial assets.
First, I congratulate you for a clear and concise description of OMO. I'd like to follow it up with a comment that goes to the heart of current monetary policy debates. In the usual economy we are used to, an increase in the banking sector "cash" is really an increase in the bank's deposits at the Federal Reserve. Treasuries are not part of the bank's reserves, but deposits at the Fed are. This means that OMO allow the Fed to increase bank reserves (the "monetary base"), and that banks can then lend out more money, creating an increased money supply and hopefully, increased economic activity. This is the traditional description of monetary policy.
Keynes great insight in monetary theory was that in some circumstances a "liquidity trap" is created where the additional reserves are not lent out, but sit as excess reserves in the banking system (about $2 trillion currently). Thus there is very little economic stimulus to OMO in these conditions. Whether or not we are in a liquidity trap is a question of fact, and the existence and growth of excess reserves seems to me to be determinative. If the Fed is buying Treasuries and increasing the monetary base, but that increase is mainly sitting in excess reserves, there will be little economic stimulus, growth of GDP will lag, unemployment will not be reduced, and inflationary pressure will not build up. There is no reason to believe that inflation or interest rates will rise in these circumstances, so forecasters who have been famously wrong in predicting large increases in interest rates and/or inflation as a result of the Fed's OMO ae wrong because they have ignored the implications of the liquidity trap.
Economics is not an experimental science and it is rare that we see a test of a theory as definitive as the last five years on the issue of whether or not a liquidity trap exists. It is even rarer that the evidence is so overwhelming in favor of one model. The opposite view has been forced into what can only be called intellectually dishonest arguments. Feldstein blames the failure of his hyperinflation predictions on the Fed paying 0.25% interest on excess reserves, soaking up all that inflationary pressure. If inflation is that easy to solve, we need never fear it again! Others (including many on this board) have gone into denial and argue that hyperinflation is happening, we just don't see it because suddenly the statistics no longer reflect the true "reality". Somehow the statistics magically became unreliable at exactly the right time, never mind that alternate measures of inflation produce pretty much identical results to the official measures.
So in a nutshell, this is what the debate over monetary policy has become. The world is either filled with confidence fairies and bond vigilantes and other magical characters or it is not. The discussion is now out of the realm of economics and into the realm of abnormal psychology.
The federal reserves open market operations aren't up for audit. So we dont know what they're actually doing there. Contrary to the belief of some.
Yes? And? There is still no authority by the GAO to audit the monetary policy, foreign transactions or FOMC operations. I provide balance sheets too. But if I was given the ability to hide my market transactions, I could cook things up in all kinds of splendid ways.
As I said, there is currently no authority to audit the federal reserve's FOMC operations.
