the fed is not printing money?

[SanMiguel]

Ok, they're monetising debt by basically issuing bonds and then buying them back so the Fed owns the bonds but where is the money coming from to do this?
The Bernank says he's not printing money and there is no more money in circulation but then why the increase in PM prices, equities, etc.?
http://pragcap.com/read-fed-print-money

 

[Pento]

It's not printing money, but instead pushing up asset prices thus surely creating inflation (cost-push inflation or the other one)?

 

[forker]

Of course it's printing money, they have to issue bonds to the fed to print money which was in the news weeks ago.

 

[Martinghoul]

Firstly, the bonds that the Fed buys are issued by the Treasury rather than the Fed itself. Secondly, if the government independently cuts deficits, it's not "monetizing debt". Thirdly, the Fed isn't printing money, but rather crediting bank reserve accounts. If the banks don't lend, the amount of broad money in circulation isn't affected by the Fed's activities. As to increases in prices of things, how do we know this isn't another example of a bunch of silly people paying wrong prices for stuff? You know, like crude at $140 and subprime CDOs at par... For a good summary, see here: http://www.themoneyillusion.com/?p=8073

 

[scose-no-doubt]

http://mises.org/daily/4869

 

[Martinghoul]

http://mises.org/daily/4869

This guy's analysis doesn't make sense to me. His scenario, as a result of which the CB becomes insolvent, is rather silly.

 

[Lodian1019]

No country can ever pay of its debt as long as there is money in circulation as that is the point of money. Money=debt debt=money.

 

[scose-no-doubt]

This guy's analysis doesn't make sense to me. His scenario, as a result of which the CB becomes insolvent, is rather silly.

Yeh it just helped me understand what they were doing with the BS. I ignore the rhetoric.

 

[SanMiguel]

Firstly, the bonds that the Fed buys are issued by the Treasury rather than the Fed itself. Secondly, if the government independently cuts deficits, it's not "monetizing debt". Thirdly, the Fed isn't printing money, but rather crediting bank reserve accounts. If the banks don't lend, the amount of broad money in circulation isn't affected by the Fed's activities. As to increases in prices of things, how do we know this isn't another example of a bunch of silly people paying wrong prices for stuff? You know, like crude at $140 and subprime CDOs at par... For a good summary, see here: http://www.themoneyillusion.com/?p=8073

Who pays for the treasury bond though? The Fed as they now own them but with their money? ...and at what stage of the process do they credit banks and on what basis - what have the banks got to do with the bonds?

 

[Martinghoul]

Who pays for the treasury bond though? The Fed as they now own them but with their money? ...and at what stage of the process do they credit banks and on what basis - what have the banks got to do with the bonds?

The US Treasury issues treasury bonds (USTs), which are bought by investors. The Fed goes into the mkt and purchases these USTs, through a reverse auction process, from investors. The banks intermediate in this process, i.e. banks buy the bonds from the investors and sell them to the Fed. As payment for the USTs it buys, the Fed credits the banks' reserve accounts with electronic money. That's what people normally refer to when they talk about the Fed "printing money".

 

[gooseman]

been doing the rounds......v funny

 

[Lodian1019]

been doing the rounds......v funny

This ones good, there are quite a lot of these being made.

There is one about order flow which is very good will have a look at eod.

 

[Rhody Trader]

Who pays for the treasury bond though? The Fed as they now own them but with their money? ...and at what stage of the process do they credit banks and on what basis - what have the banks got to do with the bonds?

The Fed purchases the Treasuries via a reverse auction from the primary dealers (read banks). In doing so it credits their accounts for the purchases by creating money (digitally) and takes delivery of the Treasuries on the settlement date (generally a couple days later). There are a lot of semantics about "printing money". What I think Bernanke is saying is that he's basically swapping one liquidity instrument for another (cash for Treasuries), and as such there's no functional increase in money supply, but the increased demand for Treasuries keeps their prices elevated, and thus market rates low.

 

[SanMiguel]

The Fed purchases the Treasuries via a reverse auction from the primary dealers (read banks). In doing so it credits their accounts for the purchases by creating money (digitally) and takes delivery of the Treasuries on the settlement date (generally a couple days later). There are a lot of semantics about "printing money". What I think Bernanke is saying is that he's basically swapping one liquidity instrument for another (cash for Treasuries), and as such there's no functional increase in money supply, but the increased demand for Treasuries keeps their prices elevated, and thus market rates low.

err..so are they creating money or swapping one instrument for another?

I understand the issue of keeping the yields low so they don;t have to pay out loads on rollovers but the money they are using is finding it's way into other assets so when do they get their money back? When all these asset bubbles burst?

 

[Martinghoul]

err..so are they creating money or swapping one instrument for another?

I understand the issue of keeping the yields low so they don;t have to pay out loads on rollovers but the money they are using is finding it's way into other assets so when do they get their money back? When all these asset bubbles burst?

How do you know the money they're using is finding its way into other assets? What if it's just a bunch of eejits who're buying other assets based on all sorts of misguided assumptions? And the question of the exit strategy for the Fed is a bit complicated, but it's likely that they get their money back when the bonds they own simply redeem.

 

[Rhody Trader]

err..so are they creating money or swapping one instrument for another?

Yes. They swap created money for securities - one asset for another.

I understand the issue of keeping the yields low so they don;t have to pay out loads on rollovers but the money they are using is finding it's way into other assets so when do they get their money back? When all these asset bubbles burst?

The Fed will get their money back in a couple of potential ways:

- coupon payments from securities held
- principal repayment on securities held
- selling securities back into the market

The first two items happen automatically. If they weren't rolling MBS pre-payments into Treasuries there would be a stead bleed of money out of the system from that.

 

[SanMiguel]

Yes. They swap created money for securities - one asset for another.



The Fed will get their money back in a couple of potential ways:

- coupon payments from securities held
- principal repayment on securities held
- selling securities back into the market

The first two items happen automatically. If they weren't rolling MBS pre-payments into Treasuries there would be a stead bleed of money out of the system from that.

That's fine but then the issue of whether they are "printing" money (of course it's electronic) means that they are increasing the money supply.
But if the banks aren't loaning as much as they used to, then it's the banks who aren;t now creating as much money as before?

How do you know the money they're using is finding its way into other assets? What if it's just a bunch of eejits who're buying other assets based on all sorts of misguided assumptions? And the question of the exit strategy for the Fed is a bit complicated, but it's likely that they get their money back when the bonds they own simply redeem.

I guess you don't but when you see markets go up in a straight line or go ballistic like silver and gold without barely a retrace, something is up. It's not like the next door neighbour is talking about stocks yet, unlike last Xmas

 

[Martinghoul]

I guess you don't but when you see markets go up in a straight line or go ballistic like silver and gold without barely a retrace, something is up. It's not like the next door neighbour is talking about stocks yet, unlike last Xmas

Yeah, but then again, didn't oil go in a straight line to arnd $140+/bbl in 2008? What about subprime CDOs between, say, 2003 and 2007? What was up then? Apart from a bunch of seriously misguided investors piling into wrong things at wrong prices...

 

[Rhody Trader]

That's fine but then the issue of whether they are "printing" money (of course it's electronic) means that they are increasing the money supply.
But if the banks aren't loaning as much as they used to, then it's the banks who aren;t now creating as much money as before?

Exactly. I think that's precisely what Bernanke is driving at. The real money supply creation takes place when banks lend - creating bank money. That bank money has been on the decline for some time now as banks write off bad debts and people pay down loan balances.

 

[scose-no-doubt]

Yes but the banks use the electronic money to buy up the bonds don't they so the money end up at the treasury being spent on public sector, funding tax cuts and all the rest at the artificially low rates innit?

The banks only get what they cream off from gobbling up the auction and moving the bonds to the Fed don't they? Nice bit of essentially risk free profit for an organisation that knows what its doing. I though this was how they are helping the banks recapitalise. Well that and by dampening interest rate volatility in the worldwide scramble to claw back 08 losses.

Seems to me that the problem is that the banks aren't lending, they're just riding the beta train along with everyone else. Can't blame them really, just because you socialise the losses doesn't mean you socialise the organisation :S Plus why open yourself up to the possibility of another wave of bad debts by lending at the beginning of a period of record unemployment in developing countries and lack of global co-ordination on just about anything that's affecting the global system.
If you went broke and someone gave you a job, would you then start lending your wages to other broke a55es like yourself? To drive the point home further, imagine the people wanting to borrow from you were temp workers in a business that just had a massive fire that wiped out loads of stock... and the insurance didn't cover it.

Stupid policy... unless you work in fixed income anyway.