How does the fed print money, actually?
Does it just debit its own account, electronically? Giving a presentation on QE.
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I would like to know as well. From a bit of what I know, i think fed sets the fed funds rate through open market policies, buying/selling treasuries. I have heard printing money used synonymously with borrowing money. So I am under the impression that printing money is in fact selling treasuries on mkts (china). I know Fed also has a reserve account, so making use of that probably also plays a role in terms of increasing money supply in the market. But I am a bit confused because when Fed injects money into the economy (recently) it does it through buying treasuries. I am not sure about any of this though, so would appreciate a more knowledgeable answer.
The federal reserve buys up treasury bills that the Treasury issues, but instead of paying Treasury for the notes they just get them. This means that money that would have bought the notes and payed for the government fiscal buying don't happen, so money that would have been taken out of the economy just stays in it. In accounting terms the liability side is never balanced against.
I hope this makes sense.
N/A.
But no money is actually injected, so how does that even increase money supply? And how does China buying up treasures come into this equation? Also when people talk about US gov. being in debt, are they talking about selling excessive amounts of treasuries, which implies gov actually has to pack back the interest and principal over debt's maturity.
When Goldman gets the cash from the Fed in exchange for the treasurys, it's not going to do nothing with that money -- that is going to go out as loans, commercial paper, commodity buys, or even purchases of new treasurys (which the government directly disburses in its expenditures).
In any inflationary process, the guy who gets the debauched currency FIRST wins. All the suckers downstream watch their dollars chase prices that adjust up to the inflation.
Thanks, but I understand "pretty much" how it happens. But I really need to know actually how it happens. So when The Fed buys securities from Goldman, how are they buying them? What transfer takes place?
Everything is electronic. No bags of cash are moved around. When I transfer money from one bank to another I click a button.
When the government buys treasuries it is taking an asset that pays a return and giving cash back. That is the injection.
When you take money from your pocket and put it into a CD you are taking money out of the economy. When you cash in that CD you are having money put into the money economy.
Where does the Fed get the money to buy treasuries? Printing? Reserve account? Fed getting treasury straight from treasury department doesn't make sense bc these bonds were never in the market in the first place. So essentially you're not injecting any increase in supply.
are you sure this correct ;p i'm sure the bank takes the money you spent on the cd and puts it some where else m8 they don't hold your money and just let you get interest for nothing
I could be wrong but I don't think that the Fed buys securities from Goldman Sachs. It wouldn't physically work that way, because then the Fed would have to pay them, which it does not do during QE.
Say there's 100 dollars in the economy. Normally when the government spends it spends 1 dollar and gives and agreement to pay 1.1 dollar in the future. So in order to do this the government issues a note for 1 dollar which someone in the public must buy, with the expectation of getting more money in the future. (This is all disregarding tax revenue of course). So the balance sheet for the economy looks like the following.
Economy : 100 + Government spending: 1 - Government Borrowing: 1 = 100 dollars
When there's QE what happens is that the Treasury bills are "bought" by the Federal Reserve. However the Federal Reserve just takes the money without paying any money for them so the government borrowing that would have taken place doesn't, thus expanding the money supply. So the equation looks like this:
Economy : 100 + Government spending: 1 - Government Borrowing: 0 = 101 dollars
So in essence the government is spending more money without borrowing which increases the dollars in circulation and thus diluting there value (ie inflation).
As far as how this actually happens I think it's just a handshake agreement that occurs between treasury and the fed that probably takes place on a proprietary in house system that I know nothing about.
QE is a bit different. In theory, QE could mean the fed purchases anything. During QE 1, the Fed bought not only treasuries, but also ABS, MBS, etc, as both a buyer of last resort for these securities but also as a way to inject liquidity into the system (so it bought it directly from the owners of these securities. In effect, GS could be a part of this). The article below goes into it in more depth, but asset purchases (buying just treasuries... this is working on the asset side of the Fed's BS) are actually credit easing as opposed to quantitative easing, which operates on the liabilities side of the Fed's balance sheet (thus, the Fed adds to a bank's reserves, and THEN buys the security from them). (BTW most of this is verbatim from the article). So Credit Easing creates money on the asset side of the balance sheet, not the liabilities side (Bernanke is very clear on this distinction... read the FOMC statement from the last meeting... not once do they call the asset purchase plan quantitative easing).
Check out this graphic for a full interpretation. Also check out the article.
http://images.businessweek.com/mz/10/46/1046_12econ.pdf
http://www.businessweek.com/magazine/content/10_46/b4203012812548.htm
As for how the Fed does during regular times, this is all done by the Fed's Open Window in NY. When Fed raises rates, it wants to shrink the money supply. So it raises rates, and it does this by selling bonds (or using REPOs) at the NY Open Window with the Fed's counter parties (18 primary broker/dealers... same guys that must make markets in treasury securities, which means when the treasury auctions money, they must make bids if others are not placing bids in the market). The opposite is true when the Fed wants to increase the money supply (buys bonds from GS and other broker dealers)
http://blogs.wsj.com/economics/2007/08/12/how-does-the-fed-inject-money…
Ahh.....I see, well done Anthony. As it turns out the Fed did it by open market operations rather than what I described. Good read.
If you are asking if I know of the physical location of this master computer when you can click a button and our money supply gets inflated, I do not. What I do know is that the Federal Reserve banks have a balance a lot like Chase has your checking account. They buy the debt back but do not pay physical cash.
Commercial banks work on deposits. Your money in your savings goes to someones mortgage, someones ATM withdrawal, whatever. The Fed doesn't necessarily need deposits because they can "print" money. Sometimes they actually do print the physical cash dollar, but transactions between the fed and large banks does not involve armored cars. They electronically transfer the money.
If you could go into your checking account and fuck with the code you would be inflating your account, but without actually putting money in it, correct? Something similar.
This explanation is not 100% correct, but I think it is a good idea of what is going on.
I came across this quote in my research, what do you make of it?
"At the end of the day, all this deflation talk is a red herring. The true purpose of QE 2 is to disguise the decreasing ability of the Treasury to finance its debts. As global demand for dollar-denominated debt falls, the Fed is looking for an excuse to pick up the slack. By announcing QE 2, it can monetize government debt without the markets perceiving a funding problem"
Also,
Consequences of QE:
Anything else I should add?
(Edit: just found this thread http://www.wallstreetoasis.com/forums/purpose-of-quantitative-easing ... nvm)
While it can certainly be argued that deflationary pressures within the US economy are not strong enough to turn current disinflation into outright deflation, it is simply incorrect to point to QE2 as a ploy to disguise weaknesses in the Treasury's financing abilities. Treasury supply YTD has had strong coverage ratios, particularly from foreign accounts which are showing historically high auction participation. Furthermore, the significant rally in Treasuries YTD as well as increasingly tight corporate spreads are a clear indication that both US and global demand for USD-denominated debt remains strong.
They explained the whole process on NPR radio a few months ago. They interviewed a guy and a girl working at the Fed who were actually in charge of this. Basically all they do is to login in Fed accounts via computer, and they go in the specific accounts they are using for that particular task (injecting money, buying mortgages etc), and with the keyboard they simply increase the dollar amounts in those accounts. That's it, that's all they do.
It was a great report and I was shocked by the simplicity. Amazing and scary at the same time, especially because the guy and the girl sounded so young and so easy going. I don't know about anyone else, but I always pictured the people doing this as veterans at the Fed, sounding super serious, like machine almost....
they usally use ms paint bc of budget cuts they can't afford photo shop XD
The Fed does NOT print money. It is simply swapping an interest bearing asset (a TSY) for a non-interest bearing one (cash) and a corresponding increase in the reserve accounts of the bank
http://en.wikisource.org/wiki/File:Modern_Money_Mechanics.pdf
In fact, the money that was already "printed" so to speak, was already spent into existence by Treasury
Generally speaking. Of course they do not just sit on your money and do nothing.
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