Readers Question: Why does the federal reserve buy treasuries? Isn’t that just taking money from one pocket and putting it in another?
There are a few reasons the Federal Reserve is buying treasuries.
- With recession and falling velocity of circulation, the Money supply adjusted for velocity of circulation is showing deflation. Therefore buying Treasures and increasing money stock is reducing threat of deflation in US
- Buying US treasuries should in theory reduce interest rates on bonds. Lower bond rates should have an effect on boosting spending and investment in long run
- Makes it easier to sell enough treasuries to fill the nearly $2 trillion fiscal deficit.
It should be remembered creating money to buy US treasuries does nothing to create real output and there is a real risk of creating future inflation.
It can be seen as an unconventional form of monetary policy to try and deal with the unusually sharp decline in output and the much feared threat of deflation.
2 comments ↓
When the fed buys US treasury bills, it is backing the US dollar with assets that are themselves denominated in dollars. So if the dollar loses some value, then so will the bonds. This means there is less backing for the dollars, so they fall still more, etc.
That explanation above about velocity, etc., is an uncritical application of the quantity theory of money, which unfortunately is the dominant theory of money.
of course will buy, It should be a guarantee for his money in the people – I mean bank money (you know what I mean)
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