Hello: Maybe someone here can shed light on this for me: I see is mentioned over and over that the FED®, in order to fight deflation (encourage inflation) would resort to buying treasuries. Why would such action by them fight deflation? It seems that it would only drive up the prices of treasuries alone, not prices over all. I don't see it as pumping that much money into the system because that money is really already there. I could see printing new money to increase the supply, thereby deflating the value of the dollar and inflating prices. But I fail to see how buying treasuries will do that. Can someone explain this to me?Thanks,Splotto
"the FED®, in order to fight deflation (encourage inflation) would resort to buying treasuries. Why would such action by them fight deflation? It seems that it would only drive up the prices of treasuries alone, not prices over all. I don't see it as pumping that much money into the system because that money is really already there."Actually, when the Fed bonds, it puts money into the buyer's bank account, which is counted as part of the money supply. (Treasury bonds are not). Increasing the money supply should stimulate the economy overall. I don't think you can say the money is already there. The fed actually creates money when they do a transaction like this. They also bid up the price of bonds, which lowers interest rates, and also stimulates the economy.
WR: I guess I still fail to see it. If I had the money in my bank account, then used it to buy a T-bill, then it was purchased back from me, the amount of money in the system was not changed. I agree that I may have sold it back at a higher rate, but they could boost the value of T-bill's buy just raising the interest on them.Splotto
The classic answer is that by buying your bonds they have put more money into the economy. I suppose that's true because even if you just leave it in your bank account the bank will go out and loan more money to people. But like you, I wonder if go out and buy another investment, particularly another government bond, how that puts money into the economy. I guess not matter what you do, the money that bought the bond winds up in some bank account and then the bank will loan more money. I think we are going into deflation right now, but they should be able to pull us out of it.
A story last Wednesday on NPR gave the ABCs of deflation regarding the FED's announcement. It didn't answer your question directly but it may give some background.http://discover.npr.org/features/feature.jhtml?wfId=1254727PF
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |