xhoster[at]gmail.com wrote:

- quote -

I don't think the Fed creates and destroys money in this instance. I
believe that the Fed has a war chest of money that was allocated to the
Fed for its purposes. So the Fed can buy bonds to inject money into the
system, and sell bonds to take money back out. In fact, if we were to
pay off the national debt, the Fed would have to deal in some other type
of security. The Fed generally earns a profit on its trading activities
and gives money back to the U.S. general fund. Right now that war chest
has pretty much been expended as the Fed has been injecting cash by
buying bonds.

I've probably slaughtered the details, but someone here will likely
correct me...

-Will

william dot trice at ngc dot com

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Sosimo Memelas <sargento[at]hotmail.com> wrote:
- quote -

The Fed has "primary dealers" with whom they conduct trades. But those
dealers can be acting for their own accounts, or for the accounts of their
customers. So indirectly, the sellers/buyers are whoever owns bonds and
wants to sell them, or has money and wants to buy bonds.

- quote -

If they buy bonds, the person who used to own the bond now owns money.
That money usually didn't previously exist, the Fed created for the purpose
of buying the bonds.

- quote -

The transactions are mostly electronic. The "money" just disappears, the
same way it just appeared when first created. It is possible that
indirectly it will result in some paper money getting moved into some
non-circulating vault somewhere, but that is doubtful, and not very
important to the big picture.

Xho

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Reading a financial tome the other day, I see:

"The law gives the Fed power to trade in the bond market. The FOMC can
direct the 'easing' of credit by having its trading desk in NY buy US
Treasury bonds. This pumps money into the banking system and eventually
into the larger economy. <...> On the other hand, the committee can tighten
credit by selling Treasury bonds. This withdraws money from the banking
system and the economy, <...
Ok, I give up. From/to whom are those Treasury bonds bought and/or sold?
And how does this take money out of, or put money back into, the economy.
Where are those bucks that are used for purchases and where do they go when
bonds are sold? Into a warehouse somewhere?

In other words, I am missing the mechanics of the situation somehow. Anyone
care to enlighten me?

SM

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