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Old 01-15-2014, 08:48 AM
 
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I realize that banks aren't lending, but wouldn't all that surplus reserve money contribute to inflation anyway?

Where is the money going? What is the point of lending the money to banks if they don't use it for what I would assume be its intended purpose, which is growing the economy?

Granted, with wages decreasing and jobs being lost, and potential loaners that lack creditworthiness, it does not seem feasible for banks to loan, so what exactly is the point?

I have a theory.

If the Fed can keep inflation below the interest rate they receive on bonds, minus the .25% in interest they pay banks to keep the money in their reserves, they would gain money in which they could use to repay their debt.

Additionally, from what I understand, roughly half of the Fed's purchase of bonds is from foreign nations, which don't require the fed to pay a .25% interest rate, and considering the volatility of some of the nations the fed is purchasing from, would likely result in higher interest rates being payed to the fed, which it could use to repay their debt.

However, when the Fed announced that it would let up on it's bond purchases, investors in emerging markets may have overreacted, by selling off their currency and causing inflation to be high enough, that central banks had to intervene.

While this would benefit the overall US geo-political strategy by causing economic distress and possible social unrest to these developing nations, it does not support the second part of my theory.

Also, for those keen on economics, why would the actions of the fed, cause speculators to overreact and sell their currency? Is it because they fear the currency would lose value if it is not backed by US dollars?

Also, when the fed does begin to stop QE, what will be the result of this on the American economy? They vowed not to raise interest rates, which makes sense because there isn't any inflation, so how will this affect things domestically?

If interests rates don't rise, the price of gold will not likely fall, but wouldn't the lack of demand cause the price of bonds to rise? But who would want to purchase bond with low interest rates?

Last edited by Del Boy; 01-15-2014 at 08:57 AM..
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Old 01-15-2014, 09:02 AM
 
Location: TX
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This question is brought up all of the time.

Inflation is a market phenomena - the product of supply and demand. Not just supply as everyone assumes.

The supply has increased as you noted, but demand (velocity) has decreased - ergo, minimal inflation. (Equation is MV = PY)

The Fed's monetary policy has nothing to do with the debt, which is the responsibility of the Treasury.
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Old 01-15-2014, 09:06 AM
 
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Quote:
Originally Posted by celcius View Post
This question is brought up all of the time.

Inflation is a market phenomena - the product of supply and demand. Not just supply as everyone assumes.

The supply has increased as you noted, but demand (velocity) has decreased - ergo, minimal inflation. (Equation is MV = PY)

The Fed's monetary policy has nothing to do with the debt, which is the responsibility of the Treasury.
That makes sense, but what is the purpose of the Fed purchasing bonds and securities from banks if the banks are not using the proceeds to lend to the economy, especially considering the FED is paying a .25% interest rate to the banks?

Who collects the interest from the bonds being purchased by the FED?

Furthermore, if the FED collects the interest, what does it do with it? Wouldn't it benefit the US to use the money to pay into the treasury to decrease the public debt?
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Old 01-15-2014, 09:39 AM
 
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It doesn't sound like a theory at all if half the "theory" is questions you cannot answer.
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Old 01-15-2014, 09:56 AM
 
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Quote:
Originally Posted by EmeraldCityWanderer View Post
It doesn't sound like a theory at all if half the "theory" is questions you cannot answer.
Wow, how constructive. Why did you even bother posting on my thread? I posted in the economics forum with the intent of receiving economic advice.
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Old 01-15-2014, 12:16 PM
 
Location: TX
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Quote:
Originally Posted by Del Boy View Post
That makes sense, but what is the purpose of the Fed purchasing bonds and securities from banks if the banks are not using the proceeds to lend to the economy, especially considering the FED is paying a .25% interest rate to the banks?

Who collects the interest from the bonds being purchased by the FED?

Furthermore, if the FED collects the interest, what does it do with it? Wouldn't it benefit the US to use the money to pay into the treasury to decrease the public debt?
The purpose of the Fed's bond purchasing is to encourage low interest rates. The banks' decisions to lend those funds is a separate matter. It would be better if they increased credit, but the demand for credit is relatively low. You cannot force businesses to borrow.

The Fed collects the interest from the bonds it purchases, and does just what you said: rebates the interest income back to the Treasury. So any sovereign debt held by the Fed is effectively free to the government.

Understand: the public debt is not a personal loan that needs to be "paid down." Treasury bonds are noncallable. Their repayment is on a fixed schedule and so the debt cannot simply be paid down whenever the gov feels like it.
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Old 01-15-2014, 01:25 PM
 
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Quote:
Originally Posted by celcius View Post
The purpose of the Fed's bond purchasing is to encourage low interest rates. The banks' decisions to lend those funds is a separate matter. It would be better if they increased credit, but the demand for credit is relatively low. You cannot force businesses to borrow.

The Fed collects the interest from the bonds it purchases, and does just what you said: rebates the interest income back to the Treasury. So any sovereign debt held by the Fed is effectively free to the government.

Understand: the public debt is not a personal loan that needs to be "paid down." Treasury bonds are noncallable. Their repayment is on a fixed schedule and so the debt cannot simply be paid down whenever the gov feels like it.
I was led to believe by college professors that the Fed funds its debt through public purchases of bonds. From what I understand, it's through the sale of bonds and through the collection of taxes, the government funds its programs.

However, I've read that when the FED performs QE, it creates money ex nihilo. How is this possible? And why would the fed use the money it created "out of nothing," to purchase treasuries? I imagine since interest rates are so low, it wouldn't garner any additional revenue in which they could use to pay down the interest on previous treasuries, that likely have higher interest rates.

I imagine if the purpose of QE was to pay down the interest rates of prior purchased treasuries, the best way to acheive that would be from the purchase of foreign bonds which have much higher interest rates.

So I guess my question is, was it the intention of the Fed to loan money and cause inflation, thus lowering the value of previously purchased interest rates from the domestic side, and on the international side, purchasing securities that will garner a larger interest rate to also help assist in paying interest on current public debt?

Also, if it is true the Fed is creating money out of nothing, wouldn't that eventually cause inflation because even though it's not currently in the system, it's still out there. Can the Fed destroy money as easily as it can create money?

Last edited by Del Boy; 01-15-2014 at 01:38 PM..
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Old 01-15-2014, 01:46 PM
 
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If someone could properly explain what QE is, I think it would benefit this forum substantially.

As I previously said, I thought the Federal Reserve's monetary policy revolved around establishing the discount rate, setting a requirement percentage for banks in so far as how much they hold in their reserves, and the sale and purchase of securities.

Additionally, I was led to believe the only way the government funds its programs is through the sale of securities and the collection of taxes.

I was not taught about Quantitative Easing, which from what I've read seems to a tool the federal reserve uses to create money out of nothing, and then purchase securities held by banks.

How can it create money out of nothing, and not cause inflation? There has been an increase in money supply, so at some point, doesn't the velocity of money have to rise or can the fed destroy money as easily as it creates it?

Does the Fed even create money or does it borrow money from its member banks? And if it does borrow money from its member banks, where do the member banks get their money from?

Do banks loan the federal reserve money? If so, how much interest is paid on the money loaned to the federal reserve by commercial banks?
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Old 01-15-2014, 04:24 PM
 
Location: TX
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I do not see how your post replied to mine. I answered your questions, and you are bringing back questions that my first reply addressed (regarding inflation and separation of the Fed and Treasury).

Recall that QE has nothing to do with the debt. QE is simply an extension of the Fed's typical open market operations. It is the same bond-buying function performed on a much larger scale. The purpose of QE is to execute the current low-interest rate policy - that's it.

Yes, the Fed creates money to buy the securities. No, it does not cause inflation - see my first reply for how inflation works.

If the Fed wants to contract the money supply (not likely in the next few years) it can do so by selling its bonds and/or raising the reserve requirement. The reserve requirement is a tool of untold power. The money is not "destroyed" literally, but effectively so.

Understand: the Fed and Treasury are entirely separate. They each have their jobs, monetary and fiscal policies respectively.
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Old 01-15-2014, 04:39 PM
 
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Who says? I think the government is likely underestimating the inflation rate.

Is America Hiding Its True Inflation Rate, and Could the U.S. Be as Insolvent as Greece? - PolicyMic

In fact, there's an entire website http://www.shadowstats.com/alternate...flation-charts that is dedicated to the question, using the pre-1990 calculations to determine what the actual inflation rate is. And the results are roughly double what the government says they are.
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