3 ms·

The Fed doesn't "give" money to anyone. They buy treasury bonds from the US government.

tomp 11y ago
You mean, instead of giving the government money directly, there's an extra step whereby the government issues bonds and the central bank buys them?
- rukittenme 11y ago
  Yes. The money doesn't go to banks or stocks or real estate.
  - pas 11y ago
    Well, yes and no. The money goes to bondholders, and whoever held the assets the Fed purchased. Basically investors. The important thing to notice is that this is all a marginal effect. The Fed bought stuff already on the market, so the asset holders already wanted to liquidate those assets, but with the Fed entering the market and driving [bond] prices up (thus keeping [bond] yields down) investors can't just roll over the money, and other investors are discouraged to invest into low-yield assets, thus they try to invest into other stuff, bonds of riskier companies, foreign markets! (The QE programs drove yields down all across the globe, foreign currencies up http://www.bloomberg.com/news/articles/2015-01-23/rupiah-philippine-peso-gain-this-week-as-ecb-spurs-yield-hunt http://www.bloomberg.com/news/articles/2015-01-23/rupiah-phi... and as a QE program ended this caused problems http://www.reuters.com/article/2013/08/19/us-india-markets-rupee-idUSBRE97I0DD20130819 http://www.reuters.com/article/2013/08/19/us-india-markets-r..., because governments - just like in pre-2008 - saw cheap loans and went to town.) So, all in all, money goes where the investor things it'll grow best (low righ and high yield). Real estate was that after 2000, nowadays it's all over the place. (RE is picking up again, look at the insane prices in SF and London; VCs pour billions into emerging sectors - look at the valuations here on HN; and naturally people look for riskier things, abroad, which is good for the global economy.)
- dageshi 11y ago
  Yes, eventually the central bank will be repaid the dollars it spent, the money spent and injected into the economy will be withdrawn as QE winds down. Assuming QE ever ends of course.
  - pas 11y ago
    US QE has ended as far as I know. (https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1.2C_QE2.2C_and_QE3 https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1.2C_...) The purchased assets (treasury bonds and so on) are idling on the Fed's balance sheet. Eventually as bonds mature the Fed just cancels the newly-created-debt it used to buy the bond, and the asset just disappears from the balance sheet.
jabgrabdthrow 11y ago
The fed "gives" the proceeds of the monopoly on taxation, which is the only backing bonds have. Some people like to call this "free" because anyone could trivially use it to create value for themselves.
pas 11y ago
No. The Fed conducts open market operations, and buys treasury bonds on the open market, directly. Because the goal is to keep the sovereign bond yields low. (To steer investors toward riskier investments with higher returns/yields.) So they basically buy up assets (return producing things) for cash (which loses value with inflation). They then sit on the assets. (People say it's on their balance sheet, and that's why it's sort of an expansionary monetary policy, because it expands the central bank's balance sheet.) That's why it's not free money to the Government. (Whereas in Venezuela, the Government directly prints money for itself to pay wages and utility bills. Basically seigniorage.)

tomp 11y ago

You mean, instead of giving the government money directly, there's an extra step whereby the government issues bonds and the central bank buys them?

rukittenme 11y ago
Yes. The money doesn't go to banks or stocks or real estate.
- pas 11y ago
  Well, yes and no. The money goes to bondholders, and whoever held the assets the Fed purchased. Basically investors. The important thing to notice is that this is all a marginal effect. The Fed bought stuff already on the market, so the asset holders already wanted to liquidate those assets, but with the Fed entering the market and driving [bond] prices up (thus keeping [bond] yields down) investors can't just roll over the money, and other investors are discouraged to invest into low-yield assets, thus they try to invest into other stuff, bonds of riskier companies, foreign markets! (The QE programs drove yields down all across the globe, foreign currencies up http://www.bloomberg.com/news/articles/2015-01-23/rupiah-philippine-peso-gain-this-week-as-ecb-spurs-yield-hunt http://www.bloomberg.com/news/articles/2015-01-23/rupiah-phi... and as a QE program ended this caused problems http://www.reuters.com/article/2013/08/19/us-india-markets-rupee-idUSBRE97I0DD20130819 http://www.reuters.com/article/2013/08/19/us-india-markets-r..., because governments - just like in pre-2008 - saw cheap loans and went to town.) So, all in all, money goes where the investor things it'll grow best (low righ and high yield). Real estate was that after 2000, nowadays it's all over the place. (RE is picking up again, look at the insane prices in SF and London; VCs pour billions into emerging sectors - look at the valuations here on HN; and naturally people look for riskier things, abroad, which is good for the global economy.)
dageshi 11y ago
Yes, eventually the central bank will be repaid the dollars it spent, the money spent and injected into the economy will be withdrawn as QE winds down. Assuming QE ever ends of course.
- pas 11y ago
  US QE has ended as far as I know. (https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1.2C_QE2.2C_and_QE3 https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1.2C_...) The purchased assets (treasury bonds and so on) are idling on the Fed's balance sheet. Eventually as bonds mature the Fed just cancels the newly-created-debt it used to buy the bond, and the asset just disappears from the balance sheet.

jabgrabdthrow 11y ago

The fed "gives" the proceeds of the monopoly on taxation, which is the only backing bonds have. Some people like to call this "free" because anyone could trivially use it to create value for themselves.

pas 11y ago

No. The Fed conducts open market operations, and buys treasury bonds on the open market, directly. Because the goal is to keep the sovereign bond yields low. (To steer investors toward riskier investments with higher returns/yields.) So they basically buy up assets (return producing things) for cash (which loses value with inflation). They then sit on the assets. (People say it's on their balance sheet, and that's why it's sort of an expansionary monetary policy, because it expands the central bank's balance sheet.) That's why it's not free money to the Government. (Whereas in Venezuela, the Government directly prints money for itself to pay wages and utility bills. Basically seigniorage.)