Could Someone Please Explain the Money Supply?

[Taciturn]

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I've been trying to get a better understanding of this myself.

What are the specifics of the transfer of money from the FED to the US gov't? Is this what open market operations are? As I understand it, the FED gives the US gov't currency in exchange for some kind of gov't security like a bond... is this correct? am I way off?

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the Fed doesnt "transfer money" to the government. The government either gets its money from taxation or by selling Treasury bonds/bills/notes etc (just call them bonds).

The Fed controls money supply by buying Treasury bonds with newly created money (increasing the money supply) or selling bonds it already owns (decreasing the money supply because the cash used to buy them reduces the buyers cash reserves and the fed holds the cash back).

Shorter term money supply changes are controlled by repurchase agreements, which are overnight or longer term (up to 2 months or so) loans that use Treasury issues as collateral.

Those deals are with banks (or other "primary dealers"), though, not directly with the Government.

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Ok. So, when the Fed increases the money supply by buying Treasury bonds with newly created money, what has it given as consideration for those bonds? anything?

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Im not sure what your question is. The consideration is the newly created money, which has the full backing of the US and the same value as any other dollars.

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Maybe my question is basic or dumb: since the Fed creates money, what, if anything, do they give up for the Treasury bonds? From your answer, and other things, it seems as if they give up nothing - I just wanted to make sure.

Assuming they give up nothing, do they get the full benefits of the bond? err... do they get the same benefits (repayment of interest, princ. etc) that a normal purchaser would get from the bond? I'm assuming they do... just clarifying. Can and do they then sell the bonds to third parties?

[Copernicus]

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I've been trying to get a better understanding of this myself.

What are the specifics of the transfer of money from the FED to the US gov't? Is this what open market operations are? As I understand it, the FED gives the US gov't currency in exchange for some kind of gov't security like a bond... is this correct? am I way off?

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the Fed doesnt "transfer money" to the government. The government either gets its money from taxation or by selling Treasury bonds/bills/notes etc (just call them bonds).

The Fed controls money supply by buying Treasury bonds with newly created money (increasing the money supply) or selling bonds it already owns (decreasing the money supply because the cash used to buy them reduces the buyers cash reserves and the fed holds the cash back).

Shorter term money supply changes are controlled by repurchase agreements, which are overnight or longer term (up to 2 months or so) loans that use Treasury issues as collateral.

Those deals are with banks (or other "primary dealers"), though, not directly with the Government.

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Ok. So, when the Fed increases the money supply by buying Treasury bonds with newly created money, what has it given as consideration for those bonds? anything?

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Im not sure what your question is. The consideration is the newly created money, which has the full backing of the US and the same value as any other dollars.

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Maybe my question is basic or dumb: since the Fed creates money, what, if anything, do they give up for the Treasury bonds? From your answer, and other things, it seems as if they give up nothing - I just wanted to make sure.

Assuming they give up nothing, do they get the full benefits of the bond? err... do they get the same benefits (repayment of interest, princ. etc) that a normal purchaser would get from the bond? I'm assuming they do... just clarifying. Can and do they then sell the bonds to third parties?

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What is given up in the creation of money is a claim against future tax revenues. this article explains the process pretty well in terms of historical paper currencies. The essential point is that there is a difference between "convertability" (eg a gold standard that allows conversion of a note to physical gold) vs "backing" (where the currency is an iou backed by assets, which may include taxing ability).Yes, when the Fed buys bonds, increasing the money supply if they are bought with newly created money, they get the same benefits as any other bond holder, and can sell the bonds. However, they dont sell them to "third parties", they only sell them to "primary dealers", which are banks and brokerages that meet capital standards established by each Fed Reserve Bank. Each Fed Reserve Bank might have 15-20 primary dealers that it trades with.

[bkholdem]

Does anyone know where that article that describes the creation of the federal reserve with like a single banker starting it way back when taking coins and issuing IOU's? It's on a freedom/anarchist type website but I lost the link.

[Taciturn]

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Maybe my question is basic or dumb: since the Fed creates money, what, if anything, do they give up for the Treasury bonds? From your answer, and other things, it seems as if they give up nothing - I just wanted to make sure.

Assuming they give up nothing, do they get the full benefits of the bond? err... do they get the same benefits (repayment of interest, princ. etc) that a normal purchaser would get from the bond? I'm assuming they do... just clarifying. Can and do they then sell the bonds to third parties?

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What is given up in the creation of money is a claim against future tax revenues. this article explains the process pretty well in terms of historical paper currencies. The essential point is that there is a difference between "convertability" (eg a gold standard that allows conversion of a note to physical gold) vs "backing" (where the currency is an iou backed by assets, which may include taxing ability).Yes, when the Fed buys bonds, increasing the money supply if they are bought with newly created money, they get the same benefits as any other bond holder, and can sell the bonds. However, they dont sell them to "third parties", they only sell them to "primary dealers", which are banks and brokerages that meet capital standards established by each Fed Reserve Bank. Each Fed Reserve Bank might have 15-20 primary dealers that it trades with.

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Alright - I understand that the dollar is backed by future tax revenues, but I wasn't asking about backing...

When the Fed creates money to purchase Treasury bonds, they didn't own, or have a claim to own, the future tax revenues that the money is backed by, right? They created it out of thin air.(?) Since it is within their power to do this, I don't see how they have given anything up in return for the Treasury bonds. Do you still feel that the Fed has given consideration in return for the Treasury bonds?

[pvn]

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Alright - I understand that the dollar is backed by future tax revenues, but I wasn't asking about backing...

When the Fed creates money to purchase Treasury bonds, they didn't own, or have a claim to own, the future tax revenues that the money is backed by, right? They created it out of thin air.(?) Since it is within their power to do this, I don't see how they have given anything up in return for the Treasury bonds. Do you still feel that the Fed has given consideration in return for the Treasury bonds?

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As you can see, people will try to obsfuscate what is going on, but by doing what you're doing, asking simple questions and refusing to take double-talk for an answer, procededing logically, you can eventually figure out what's really happening.

More answers: http://www.mises.org/money.asp

[AWoodside]

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There is nothing that stops you from starting printing your own money, you can do it in many ways, you can i.e. issue bonds and connect them to gold or another currency or whatever you want. Many companies and banks do this. There isn't a legal government monopoly on it, just a practical one.

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O RLY???

[hmkpoker]

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the Fed doesnt "transfer money" to the government. The government either gets its money from taxation or by selling Treasury bonds/bills/notes etc (just call them bonds).

The Fed controls money supply by buying Treasury bonds with newly created money (increasing the money supply) or selling bonds it already owns (decreasing the money supply because the cash used to buy them reduces the buyers cash reserves and the fed holds the cash back).

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What is given up in the creation of money is a claim against future tax revenues. this article explains the process pretty well in terms of historical paper currencies. The essential point is that there is a difference between "convertability" (eg a gold standard that allows conversion of a note to physical gold) vs "backing" (where the currency is an iou backed by assets, which may include taxing ability).

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The point is that the Fed is getting a free lunch, and that's not economically possible. Whether or not the recipient of the newly-printed money is trading something something of similar value doesn't matter; the point is that the Fed is creating something out of nothing, which any school of economics knows is impossible.

When any other business sells something, it incurs a risk. It must invest something (money, time, labor, scarce resources) in production before it can be sold to consumers for a profit. If a business did not have to invest anything, then that means that the good/service that it sells is not limited in supply, and in a free market would be readily available for no cost.

This is not the case with the Fed. When it issues credit, literally nothing is being lost. The cost to the Fed of billions of dollars of bonds sold to the US government is nothing more than bankers' time needed to issue the bond, and the paper it is printed on (if any). They risk nothing. If the Fed were to buy a Treasury bond for a billion dollars and then destroy it, ir would lose nothing. It just acquired a bond for free.

When they sell the bonds back and the money comes back to the Fed, voila, the Fed just made its own money back for virtually no cost. The actual process of the transactions may be complex, but the fact is that the Fed is producing wealth out of nothing. That isn't possible. Resources must come from somewhere.

You can argue the process all you want, and I'm sure you know more about it than 90% of the forum, myself included, But the fact that the Fed does acquire wealth without producing anything cannot be denied. It is literally transferring the peoples' money into its own reserves.

[tolbiny]

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When they sell the bonds back and the money comes back to the Fed, voila, the Fed just made its own money back for virtually no cost.

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Actually it gets it back, and more. From what i understand the Fed collects the interest on the bonds it holds, something like 50 billion a year (since its a not for profit anything not spent on offices and salaries is "returned" to the government.

[lehighguy]

During the gold standard, it did. Now there is far more money outstanding then gold to back it up.

[Jeffiner99]

One thing I find missing from this thread is the definition of inflation. The word has been hijacked and replaced. It actually means monetary inflation = increase of the money supply. When the money supply goes up, the value of the money decreases. When the value of the money decreases it takes more money to purchase things, hence prices rise. Prices rising = price inflation.

It takes a while to see this cycle. Thus, by the time the prices rise the people who inflated the money supply can blame the rising prices on something else. Then they use the word inflation to mean price inflation: something mysterious that can't really be fully explained.

But it is explained. Simply. Inflation comes from printing more money.

Why do we have to accept this paper? See legal tender laws.

Why is the federal reserve the only one who can print money? Because Congress said so.

The Federal Reserve is a cartel. It is a private cartel that does not answer to anyone. Yes, it would help a lot if we knew how much they were printing, but they won't tell. If you were a counterfeiter would you?

This system is a way for the federal government to get the dollars it wants to fight wars and create programs without taxing the people directly. If it did tax directly the people would shout bloody murder. But the people don't know this is happening to them. So the politicians get all the money they want, and the purchasing power of the dollar keeps dropping, personal savings are worth less each year, and the rich get to stick their hands into the people's pockets every night and take as much as they think they can get away with.

The reason this fiat system always fails is that politicians are greedy and keep taking more and more and more. Eventually the strain on the currency is too much to bear and we get hyper-inflation where it costs 5000 to buy a loaf of bread because the dollars are worthless. Already, other countries are starting to avoid dollars in favor of the Euro.

Mises.org does a great job of explaining it. So does Murray Rothbard. You can do a search of google videos to find out about the Federal Reserve. They are a bunch of thugs. Very secret thugs. Not even the president knows who they all are. They are the cause of all of our financial instability not the solution although that is how they try to sell themselves.