[Chad.e.nelson.1]

I just read an essay by MNR wherein he describes deficits as being either inflationary or not, depending on whether banks are buying treasury bonds or the general public are buying them. If it’s the latter, he says, no new money is created (this is clear) but if the former, then banks are simply creating new money to buy them.

Is this just common knowledge that banks create new deposits to buy treasuries? Could they not genuinely purchase them with existing savings just like an ordinary investor? Or is that just simply naive?

[jmherbener]

Banks pay higher interest rates to borrow from savers than they earn from Treasuries of the same maturity. So, they would suffer losses intermediating credit in this way.

http://www.bloomberg.com/markets/rates-bonds/government-bonds/us

http://www.bankrate.com/cd.aspx

They could, of course, borrow short term and lend long term and earn an interest rate differential. But this is risky and issuing fiduciary media, while also risky, is more profitable.

[maester_miller]

So basically, they COULD be buying treasuries with previously existing funds, it’s just very unlikely?

Is there any way we can tell/prove it one way or the other? If Ben Bernanke came out and insisted that he wasn’t buying treasuries with new funds, but rather with the profits the federal reserve has already made, could we prove this statement false?

[jmherbener]

If you’re referring to the Fed and not commercial banks, then we can look at its balance sheet to see which liabilities increase as it increased its Treasury holdings.

The PP slides on the Fed’s balance sheet are in the lecture on monetary policy.

Here’s the summary:

On Jan. 30, 2003 the Fed held $630 billion in Treasuries (an Asset) against $643 billion in Federal Reserve Notes (a Liability).

On April 4, 2012 the Fed held $1,669 billion in Treasuries and $837 billion in Mortgage Backed Securities against $1,060 in Federal Reserve Notes and $1,542 billion in Deposits.

The Fed has expanded base money from $669 billion to $2,602 billion to buy the additional assets. The Fed’s equity (past “profits” it is holding) rose from $17 billion to $55 billion over the same period. So, clearly, the Fed did not draw down its accumulated “savings” to pay for acquiring the additional assets.

[Author]

Posts