5 ms·
Actually the Fed doesn't pump dollars into the market. The fed buys bonds in the open market with newly created deposits. This alters the composition of balan
by lottin 5y ago
Actually the Fed doesn't pump dollars into the market. The fed buys bonds in the open market with newly created deposits. This alters the composition of balance sheets of financial institutions but not the size.
- gruez 5y ago>Actually the Fed doesn't pump dollars into the market Except when they did. Random google search: >The central bank began purchasing ETFs such as the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the Vanguard Intermediate-Term Corporate Bond ETF (VCIT) in early May last year. However, even if all they do is buy bonds, money is fungible so those purchases will still spill over to other markets as investors chase for yields. If you pump a few trillion dollars into the bond market it's unrealistic to assume that it'll stay contained to just the bond market.
- lottin 5y agoIf you are a bond holder, and the Fed buys $1000 worth of bonds from you for $1000, how is this causing everything to go up in price? Notice that your purchasing power is exactly the same before and after the purchase.
- gruez 5y ago>If you are a bond holder, and the Fed buys $1000 worth of bonds from you for $1000 Then what, do you just keep that $1000 in cash while inflation slowly eats away at it? No, you'll invest it in something else (eg. stocks), so now the market for that has an extra $1000 injected into it.
- lottin 5y agoYou already had a bond.
- gruez 5y agoThat's generally the precondition for selling a bond. I don't see how that's relevant to my previous comment though.
- lottin 5y agoYou said you'd use the cash to buy an investment because you don't want to hold cash, but you already had an investment —the bond— which you sold for cash. That doesn't make a whole lot of sense, does it?
- gruez 5y ago>but you already had an investment —the bond— which you sold for cash. And then what? After you sold that bond you're going to stop investing?
- lottin 5y agoI don't know... if you wanted to sell the bond in order to buy stocks or something else, you'd have done that anyway, so it's unclear how the fact that the Fed purchased your bond is making everything to go up in price.
- gruez 5y ago>if you wanted to sell the bond in order to buy stocks or something else, you'd have done that anyway Where is the fed getting the 4 trillion dollars worth of bonds from? Existing bond holders, right? Are you telling me that even without the fed buying up bonds, that bond holders would still be converting 4 trillion dollars worth of bonds (net) to stocks/cash?
- lottin 5y agoWell, yes. The average daily trading volume in the US bond market is in the order of 0.8-1.0 trillion, which means 4 trillion over a span of several months is nothing. Inflation doesn't come about as a result of the Fed pumping asset prices up, this is a misunderstanding on your part. It comes about, at least in theory, as a consequence of lower nominal interest rates.
- onlyrealcuzzo 5y agoThey don't buy $1000 of bonds from you for $1000 dollars. The whole point is to push yields down. When yields go down, prices go up. So they are buying what was $1000 worth of bonds for more than $1000.