5 ms·
The fed has unlimited control over the rates. They could literally just buy out every bond in existence.
by internet_user 7y ago
The fed has unlimited control over the rates. They could literally just buy out every bond in existence.
- tunesmith 7y agoI don't see how that works. If the US Government has to sell bonds to borrow money to finance the deficit, and buyers start disappearing, they have to raise interest rates to make the bonds more attractive to the remaining buyers, don't they?
- opportune 7y agoNope because the Federal Reserve can issue new Federal Reserve notes (aka money) to the US Government to buy their bonds at any price point. As the other commenter pointed out this would cause inflation (as it increases the money supply)
- tunesmith 7y agoI see. Printing money to buy new financial assets would also cause greater wealth inequality and populism, although maybe those are seen as benefits to the current administration.
- deleted 7y ago[deleted]
- opportune 7y agoI could be wrong but I don't think buying US treasuries would directly increase wealth inequality, since the money is being used to fund the US government. If the Fed bought other more private assets off the market (which I believe it does) then yes it could increase wealth inequality
- tunesmith 7y agoPossibly, I may be confused between simply buying treasuries, and quantitative easing. Still learning!
- ethbro 7y agoTo broadly simplify: Buying treasuries = the Fed giving money to the US government Quantitative easing = the Fed giving money to banks In the case of the US, the entire game is also complicated by the fact that the US dollar has insinuated itself into the global economy. Most critically in oil markets. Because of this, there are some things the Fed can do (mostly) without the consequences other countries would face.
- gumbo 7y agoThis would increase wealth inequality because it’s mostly well-off Americans that own financial assets. Look at the wealth inequality increase since 2008. It can mostly be attributed to federal reserve QE policy.
- wrong_variable 7y agoProducts don't grow on trees. If the fed buys every USD bond in existence ( aka monetize the debt ) - it would lead to a good amount of inflation.
- imtringued 7y agoInflation isn't global, it can easily happen in economic sectors that exclude the vast majority of the population.
- drtillberg 7y agoYes, but the pressure to pay off those bonds would be deflationary, so in order to sustain the inflation next the Fed would have to do something even more extraordinary! AFAIK this policy pathway leads ultimately to bond forgivenesses (or funky bankruptcies) that eliminate deflationary pressure but may well have the unpleasant side effect of radically adjusting the fiat currency system.
- im3w1l 7y ago> Pay off those bonds I don't think that would happen. They will just borrow ever more. Which if debt increases slowly enough, is sustainable but causes inflation.
- AnthonyMouse 7y agoHow do you mean? If the Fed creates new money and buys bonds with it, the Fed can continue to hold them forever (really just until they mature) if it wants to. Then the Fed is more or less part of the government, so when the bond matures the Fed takes the bond to the treasury which gives it cash, then it gives the cash back to the treasury. It's like the bond evaporates into nothing when it matures while the Fed is holding it. If the Fed theoretically bought all the bonds then it could obviously no longer increase the money supply by buying bonds, but we're a long way from that, and even then the Fed could still create new money and give it directly to the treasury to spend in lieu of collecting taxes. Or in the utopia where buying all outstanding government debt and funding the entire federal budget out of new money still hasn't caused the desired amount of inflation, to use to enact a negative income tax.