The Treasury or Fed took a bunch of money out of circulation

Discussion in 'Economics & Trade' started by wgabrie, May 27, 2021.

  1. wgabrie

    wgabrie Well-Known Member Donor

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    I can't find it now, but in the past few days I saw a news headline (didn't click on it) that the Treasury or Fed took a bunch of money out of circulation (perhaps about $1 trillion dollars, or thereabouts).

    If I understand this correctly it has the effect of lowering inflation. So, we might not have hyperinflation after all. And all those trillions of dollars spent in COVID-19 stimulus packages have been counteracted. So, are we good now?
     
  2. FreshAir

    FreshAir Well-Known Member Past Donor

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    the fed bought stock under Trump if I recall, maybe they sold their stock

    for all Trump's claiming he had a great economy, the fed sure had to dump a ton into it to keep it afloat
     
    Last edited: May 27, 2021
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  3. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    Sort of, but no.

    Taking money out of circulation doesn't necessarily reduce the inflation back down to the level it was before that money was put in circulation.

    What you need to understand is that the US dollar is not simply just fiat currency. In some sense it is backed by something, the Reserve Assets held by the federal Reserve.
    What causes inflation is when the Federal Reserve Bank issues more money to buy Reserve Assets, but they pay more for those Assets than the market values them at. They do this for a variety of reasons, mainly to effect economic policy and try to impart some desired effect to the economy.
    Once you buy Reserve Assets for more than they are actually worth, you can't sell them and get all of the original money back. So the country is left with some residual inflationary effect.


    The government under the Biden Administration has been engaging in massive deficit spending. This means the Treasury is having the borrow more money. More debt put out there in the economy also has some inflationary effect, since Treasury bonds and notes function as money in the economy, to some extent.
    The Federal Reserve Bank is very likely going to have to buy some of this debt to keep interest rates from rising, which will require issuing more money.

    So the Fed selling off some of their Reserve Assets is probably going to do very little to combat inflation in the face of this massive deficit spending.
     
    Last edited: Jun 4, 2021
  4. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    Reducing the money supply does have some effect of reducing inflation, but it's not the simple 1 to 1 proportional effect many people would be expecting.
    It's more complicated than that.

    If I can use an analogy, it's a little like a corporation deciding to issue more stock. If they offer new stock at a lower price than the current stock is valued in the marketplace, it will dilute down the share price of the already issued stock.
    This is not that uncommon, and many times investors are not that happy about it, and there are lawsuits against the company.
    Now, if a corporation decides to buy back some of their stock, simply reducing the number of existing shares of stock will not necessarily increase the price of those shares. Theoretically, if they paid exact market value to buy back those shares, it should have no net effect on the share price.
     
  5. wgabrie

    wgabrie Well-Known Member Donor

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    Oh, so what do you think it will be like in a nation with higher inflation rates?
     
  6. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    I have no idea how your question relates to what I stated.
     
  7. Chrizton

    Chrizton Well-Known Member

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    Not what is happening exactly. They are doing reverse repos. Basically banks have too much cash in their reserves due to all the stimulus so the fed sells them some of the treasuries it holds and takes back the cash, but with the agreement that they will repurchase the treasuries at some point in the future at a higher price. My guess is that the fed is trying to stop something from officially happening on the front page that is already happening in the repo markets---negative interest rates on US treasuries.
     
  8. L_Ron_Paul

    L_Ron_Paul Member

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    I have read they have sold around $13B of corporate bonds and corporate bond ETFs. For reference, the entire corporate bond market is around $50T, so this amount is about a quarter of .1% of the market. So very limited impact. They are still buying large amounts of treasuries and MBS.
     
  9. wgabrie

    wgabrie Well-Known Member Donor

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    I was looking at a graphic (Link: Facebook) that the Whitehouse projects that the US economy will grow by 6.9%. But then I realized that economic growth and inflation are two separate things.
     
  10. wgabrie

    wgabrie Well-Known Member Donor

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    Oh, it sounds like people should go out and spend some money. That's the answer to the problem(?) of banks having too much money, right? Too bad the public wants to save their money after living through two major economic downturns (The Great Recession and the Covid-19 shutdown).
     
  11. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    For a moment there, I thought you were being totally sarcastic.

    According to some economic theorists, the more rapidly ordinary people spend money in the economy, the faster it ends up in the hands of large corporations.

    It might even result in a higher overall rate of inequality of you're encouraging ordinary people to spend more.
     
    Last edited: Jun 5, 2021
  12. wgabrie

    wgabrie Well-Known Member Donor

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    That's what happens when people put money into temporary items instead of assets. But most people can't afford assets.
     
  13. Chrizton

    Chrizton Well-Known Member

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    That is exactly what happens. They don't have any good companies to take over (mergers are way down since covid). Even if they wanted to expand their footprint (not that many do), they haven't been able to build and staff They just hold onto the money, repurchase their own stocks, or buy cash equivalents. If money markets go into negative interest, Lord only knows how crazy the financial system will get since that is the last hand hold before you fall off the cliff. It will be ugly for many.
     
  14. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    Repurchasing their own stocks doesn't necessarily change the stock price or change anything. It's just like a large payout to the owners of the stock.

    (Imagine the company buys back a percentage of the stock from every person who owns the company's stock)
     
    Last edited: Jun 17, 2021
  15. Chrizton

    Chrizton Well-Known Member

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    Companies do not pay themselves dividends. If they buy back their own stock 1) The shares still outstanding see increased demand for them (and price over the long haul) and the owners of those stocks get a bigger cut of the dividends, if any.
     

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