Does the Fed create money buy buying government bonds?

Question

and it is called "monetinizing spending"?

how does this work?

HOW DOES IT "MAKE MONEY" BY SPENDING IT??

THIS IS NOT MY IDEA, THIS WAS AN ARGUMENT BY SOMEONE ELSE. DID NOT MAKE SENSE TO ME.

WELL HOW DOES THE FED PAY FOR IT?

ELECTRONIC BANK TRANFERS IN WHICH CURRENCY??

Answer 1

Wow dude, take a breather. Here's the deal:

1. You deposit $1,000 at your bank. They do not hoard that currency in their vault. The bank must get a return on that money, so the bank will 1) loan it out, which it can do if it has cash on hand, or 2) make a short term investment in gov't bonds, keeping the bonds as an interest-paying asset.

2. The bank can lend cash, but it cannot lend the bond. Therefore, its bond holdings naturally limit how much money the bank can lend at any time.

3. The Fed buys and sells these gov't bonds to banks in order to control the money supply. (The Fed has cash on hand just from being the government's banker and through it's ongoing business. But the Fed can create money itself when necessary).

4. When the fed wants to INCREASE the money supply, the Fed will purchase some of those bonds from a bank -- the Fed trades cash to the bank for the bonds.

5. The bank now has more cash on hand, so the bank does what banks do with cash -- it'll lend it out to a customer taking a loan.

6. And that is the nexus of money creation. If you've followed these steps, you see that some portion of your original $1000 deposit has now been loaned to someone else. You still have all your money in the bank -- that money is still yours. But someone else who has taken out a loan ALSO has (new) money. Your money gave birth to their money, so now there is new money created.

7. Going back to the Fed, note that this new loan was enabled when the Fed bought a bond from the bank, leaving it with more cash to lend out. This is one thing the Fed does to increase liquidity (increase the money supply) -- this is called "Open Market Operations".

8. The Fed can tighten the money supply by doing the opposite -- making a bank buy a bond from the Fed, so that the bank has less cash to lend out.

Answer 2

Yes it does. It is called open market operations. It is a tool used to increase or decrease the money supply in the economy. If the FED wants to decrease the money supply because their is inflation in the economy (too many dollars chasing too few goods) than it will sell bonds to the public. The public will give the FED money for the bonds and this will take the cash out of the market.

Your question is the opposite. To increase the money supply to spur economic growth, the FED will buy bonds back from the public. It will give the money back to the people and take the bond. This puts cash into the economy.

After that the people either spend the money or put it in their bank where they choose to deposit it. Either way the money ends up in a local bank eventually. This lowers the interest rates because there is more money the bank wants to lend. At the lower interest rate businesses and consumers borrow the money to purchase equipment, tools, houses, cars, etc. etc. etc. because the cost of borrowing money (interest rate) has gone down.

: )


You can find the open market operations link on the FED Bank of New York's webpage. It say's at the top of the page. "The Bank implements monetary policy primarily by conducting temporary and permanent open market operations. By buying and selling government securities, the Bank affects the aggregate level of balances available in the banking system, and thus impacts the federal funds rate."

Answer 3

The Fed buys bonds from dealers. The dealers put the money in their bank accounts. The amount of money in the banking system expands.

Answer 4

The gov't prints money, the fed (a private company) buys it but not at face value.

When the fed buys gov't bonds, that money goes into circulation.

Great gig if you can get it.

Answer 5

it is going to reason a crowding-out. in view that to borrow additional money, the government has to offer extra bigger pastime value. on the choice,if the FED buys the government securities, it could save the fund value low.