Money Supply

[lawman]

I read that 80% of all dollars have been put in circulation since 2020..

1. How does the Fed inject money into the economy..
2. Explain how the Fed buys bonds and then lets them roll off the balance sheet. Is this the way those dollars are taken out of the economy?

 

[MichaelB]

I read that 80% of all dollars have been put in circulation since 2020..

1. How does the Fed inject money into the economy..
2. Explain how the Fed buys bonds and then lets them roll off the balance sheet. Is this the way those dollars are taken out of the economy?

Although I’m quite sure there will be disagreement with my post, the Fed does not inject money inject into the economy. Money is created by banks.

The Fed is buying and selling US Treasury bills. Money is not created when it buys, nor is it removed when it sells or allow to mature. When a treasury bond matures, the US Treasury sells a new one to replace it because it doesn’t redeem. If the Fed doesn’t buy it someone else will.

 

[OldShooter]

https://www.amazon.com/Instant-Econ.../ref=tmm_pap_swatch_0?_encoding=UTF8&qid=&sr=

 

[SnowballCamper]

From the investopedia article:

The Federal Reserve creates money when it decides that the economy would benefit by it doing so. It creates money not by printing currency but by effectively adding funds to the money supply.

The Fed does this in various ways, including changing the target fed funds rate with the goal of affecting other interest rates. Or it may buy Treasury securities on the open market to add funds to bank reserves. Banks create money by lending excess reserves to consumers and businesses. This, in turn, ultimately adds more to money in circulation as funds are deposited and loaned again.

Low interest rates promote more lending. Because a bank is not required to have as much money as it lends out, this lending makes money. Increasing interest rates makes borrowing more expensive, so there is less lending, and less money is made. Over time this reduces price increases, thus reducing inflation.

https://www.federalreserve.gov/aboutthefed/files/the-fed-explained.pdf

https://www.investopedia.com/articl...tanding-how-federal-reserve-creates-money.asp

 

[copyright1997reloaded]

Although I’m quite sure there will be disagreement with my post, the Fed does not inject money inject into the economy. Money is created by banks.

The Fed is buying and selling US Treasury bills. Money is not created when it buys, nor is it removed when it sells or allow to mature. When a treasury bond matures, the US Treasury sells a new one to replace it because it doesn’t redeem. If the Fed doesn’t buy it someone else will.

QE results in money creation. When the Fed buys longer term securities (e.g. bonds), they give the seller $ (digital bits but still money) which the seller of the security can use to lend/invest in other parts of the economy.

Without QE operations, you are correct - the fed does not directly inject money, the banks do via the reserve rate and our fractional reserve system.

To the OP - when a bank gets $ from a depositor, it is a liability of the bank. When they turn around and lend that $ to another person, it is an asset of the bank. That 2nd person can then take that money (loaned to them) to another bank, and then it in turn can be loaned again and again... Now, the bank needs to keep *some* of that money to be able to handle requests from depositors (i.e. they want some of their deposits back). They try to manage that by tying up some of the money in the form of CD's (e.g. instruments that the depositors can't just "demand" (demand deposits). How much the bank needs to keep in reserve is complicated, but also controlled via a rate that the federal reserve sets - the reserve rate (aka reserve requirements). The Fed reduced that rate to 0% in March of 2020.

Some banks may have more in reserve than necessary, some less than what they need. If a bank has more than it needs at the end of the day, it might lend it to another bank. Since it is a loan, and they don't do this just because they are nice, they charge the other bank interest. This interest rate is known as the Federal Funds rate, and the federal reserve "targets" and measures a range it would like to see in terms of these loans.

Finally, some banks with excess reserves like to keep those excess reserves with the Fed. The Fed can pay those banks interest on those excess reserves - this is the Interest Rate on Excess Reserves (IOER). The fed can influence bank lending by adjusting that rate. The lower the rate, the more likely the bank will lend out those excess reserves (stimulating money growth via fractional reserve system), the higher the rate the more likely the bank will just part the excess funds with the Fed.

The above is simplified, and if I've missed things - I hope others will point it out and also be kind to me.

Also, I'm now an old geezer, and I learned this long ago (BS Economics magna cum laude '78).

 

[NW-Bound]

https://www.amazon.com/Instant-Econ.../ref=tmm_pap_swatch_0?_encoding=UTF8&qid=&sr=

...
Also, I'm now an old geezer, and I learned this long ago (BS Economics magna cum laude '78).

I was an engineering major. I took two courses in Economics, Macro and Micro, which did not cover anything about money supply or the role of the Fed that I can remember. Or maybe I just fell asleep in class.

The above book looks like a good summer reading. The reviews on Amazon are favorable, so I just placed an order.

 

[Chuckanut]

Price is a function of supply and demand.

Politicians and people with an axe to grind or a pot they need stirred up like to gloss over this. But, they can’t control the market any better than King Canute could make the tide not come in and wet his royal feet.

 

[jurgs01]

The fed buys something and creates money to do it (in the form of a bank credit in dollars). It destroys money by selling assets and removing those dollar credits from the system.

This should balance out, but the fed's ever growing balance sheet is inflationary.

Since our money supply is debt based and driven by a fractional reserve banking system, artifically low interest rates and long term growth in the fed balance sheet can create huge asset bubbles and misallocation of resources. Removing the monetary heroin from the addict can cause withdrawls, as we are seeing.

 

[copyright1997reloaded]

I was an engineering major. I took two courses in Economics, Macro and Micro, which did not cover anything about money supply or the role of the Fed that I can remember. Or maybe I just fell asleep in class.

How the banking system works (even at an introductory level like my description) is typically not covered in the intro Macro/Micro classes.

Your comment got me thinking, and I went and looked at my transcript from long ago. In addition to Intro Macro and Intro Micro, I had exciting classes like:
Econ Statistics
Consumer Affairs
Price Theory
Money and Banking (the subject discussed here)
Intermediate Macro
Economics of Computing (grad course I took as undergrad)
Intermediate Micro
Honors Seminar
International Trade
Multinational Corporations

I was a double major, Econ and Computer Science (and CS had a math minor requirement), graduated in three years....so I was a busy and mostly dull boy going to school year round. I interviewed for jobs both in CS and Econ areas - $ was better to do software and so that is the direction I went. In retrospect, I should have tried to get a job on Wall Street doing I/T - but I had no desire to live in NYC (even though I ended up working there late in my I/T career).

 

[lawman]

The fed buys something and creates money to do it (in the form of a bank credit in dollars). It destroys money by selling assets and removing those dollar credits from the system.

So walk me thorough it..The Fed takes a magic wand and adds money to it's balance sheet..It then uses that money to buy bonds. Then what happens ? Does it then just reduce the balance sheet by the amount of the bond payments as the bonds pay out until they finally mature?

 

[NW-Bound]

How the banking system works (even at an introductory level like my description) is typically not covered in the intro Macro/Micro classes...

Good. I did not miss out that much on the course material.

If I had learned more about economics, I would have invested in the stock market earlier and would not miss out on the market bull run of 1980-2000.

My parents never knew much about investing. I did learn to be frugal like they were, and that helped. But to think of the money I could have had, just to buy any MF during that period. We did have some money in the market, but it was mostly in the megacorp contribution to our 401k. Our own money was stashed in safe low-yield fixed income.

 

[copyright1997reloaded]

So walk me thorough it..The Fed takes a magic wand and adds money to it's balance sheet..It then uses that money to buy bonds. Then what happens ? Does it then just reduce the balance sheet by the amount of the bond payments as the bonds pay out until they finally mature?

Yes, it is magic. The bonds they bought are assets on their balance sheet, and the created out of thin air. The federal reserve issues the sellers of those securities notes (Federal Reserve Notes, i.e. $).

Bond payments would be profits to the Fed. By law, the Fed must return those profits to the US Treasury. Note that if the securities purchased are US Treasury notes/bonds/bills, then the interest paid by the federal government on those instruments is in turn returned to the federal government.

The Fed can reduce its balance sheet a couple of ways. One, it could sell bonds/other instruments it owns (before they mature). As you note, it could also not reinvest as securities mature.