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> This is because the Fed’s trillions of dollars of long-term investments yield 2% but cost 4.6% to finance. "..to finance", but finance from where!? It's not
by vishnugupta 4y ago
> This is because the Fed’s trillions of dollars of long-term investments yield 2% but cost 4.6% to finance.
"..to finance", but finance from where!? It's not as if Fed is a household where it has to get money from somewhere at 4.6% interest and invest it. What am I missing here!?
- neilwilson 4y agoThe Fed is the central bank. It artificially sets the price for money higher than the zero it would tend to naturally (given that money is essentially costless to produce). So they have decided to finance their liabilities at 4.6% while only receiving 2% on the assets they hold. The 2.6% difference is funded by creating new money, which the Fed believes will reduce inflation. You couldn't make it up.
- qeternity 4y agoThis is an overly simplistic take. The other way to frame this is that they are levered 40x in removing liquidity from the system. By spending 2.6% they can remove trillions from the economy and slow the velocity of money.