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"$100 million richer" is wrong, but increasing the demand for treasuries makes them worth more, which makes their holders more wealthy.
by natrius 13y ago
"$100 million richer" is wrong, but increasing the demand for treasuries makes them worth more, which makes their holders more wealthy.
- tedsanders 13y agoConsider the following. I am the Fed. (1) I announce that my general policy will be to buy treasuries when I want to spur inflation (2) I announce that next week I am going to buy $100 million of treasuries. (3) I actually buy the treasuries. A very interesting question is: At which point (1, 2, or 3) was demand increased? (I would argue that if Fed purchases are expected, they do not change the price and treasury owners do not benefit.)
- dllthomas 13y agoAssuming they don't execute in sufficient quantity for there to be liquidity issues, at each point the price will change to incorporate the market's guess as to how much they'll be buying relative to how much various parties want to sell - which will be entirely accurate after (3), and fairly accurate after (2). Whether it goes up or down for 2 and 3 depends on whether the market has over- or underestimated just prior, but it will certainly be up at each point over the Fed holding a different policy. Since the Fed's policy is what we're discussing (rather than whether we should be long or short T-bills just prior to each event), the distinctions you're making aren't terribly important.