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Given the following facts:1: Quoted from Bureau of Engraving

Given the following facts: 1: Quoted...
Given the following facts:

1: Quoted from Bureau of Engraving and Printing (http://www.moneyfactory.gov/uscurrency/annualproductionfigures.html)

"During Fiscal Year (FY) 2012, the Bureau of Engraving and Printing delivered approximately 35 million notes a day with a face value of approximately $1.5 billion."

"During Fiscal Year (FY) 2012, the Bureau of Engraving and Printing delivered approximately 8.4 billion notes at an average cost of 8.7 cents per note."

"Over 90 percent of the notes that the BEP delivers each year are used to replace notes already in, or taken out of circulation."

2:Quoted From: (http://www.federalreserve.gov/faqs/currency_12773.htm)

"There was approximately $1.2 trillion in circulation as of August 14, 2013, of which $1.16 trillion was in Federal Reserve notes."

3: Quoted from: (http://en.wikipedia.org/wiki/Quantitative_easing)

" QE3 has earned the popular nickname of "QE-Infinity."[47] On 12 December 2012, the FOMC announced an increase in the amount of open-ended purchases from $40 billion to $85 billion per month.[48]"

4: Quoted from: (http://www.newyorkfed.org/aboutthefed/whatwedo.html)
"See the FOMC section below for more detailed information and the New York Fed’s role.

The Fed uses three tools to implement monetary policy, the most important being open market operations. These “domestic operations” are conducted for the System only by the New York Fed under direction of the FOMC. Through open market operations, the Fed buys or sells U.S. Treasury securities in the secondary market to produce a desired level of bank reserves. These securities are held in the System’s portfolio, which is known as the System Open Market Account or “SOMA.”

The “primary dealers,” designated by the New York Fed, serve as its counterparties in open market operations and other securities transactions. The Fed adds extra credit to the banking system when it buys Treasury securities from the dealers and drains credit when it sells to the dealers. As the laws of supply and demand take over in the reserves market, the cost of funds for the remaining reserves finds its level at the federal funds rate."


Could you explain how the Fed creates the money to buy the QE2 securities since there are no significant increases in Federal Bank Notes? It appears that the Fed is writing an $85 billion check every month from an unfunded account.

I know that the securities mature in the future or that the Fed can start selling as well as part of its inflation controls, but if my understanding is correct, how could all that new money avoid inflating.

Also, could you explain how the primary dealers are not just a pass through for the Treasury. The Treasury is the big beneficiary of being able to sell an extra 85billion of securities every month. If I was a dealer, wouldnt I buy extra Treasury Auction securities if I knew I could flip them to the Fed?

Does this extra 85 Billion per month find its way to the public? and if so would not the new deposits create extra reserves and in turn more deposits and more reserves etc.?

How does that help inflation?

I know Keynes says that we should spend our way out of a recession but does this make sense?

Thanks
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9/13/2013
Angela--Mod
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Customer reply replied 4 years ago
This is not for a course. I got my degree in 1988. This is for my own interest. Almost any answer will satisfy my question. I am just looking for some perspective in order to improve my understanding. A multi part answer is not required. The more informative the answer, the better I tip.
Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 4,545
Experience: Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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Dear Friend,

Hello and welcome. Thank you for providing an opportunity to assist you.

You have asked a very good question. Let me try and throw some light on these issues.

To begin with, you will need to know what is Fed's QE -- Quantitative Easing. This, is a method, as you say to increase the money supply.Quantitative easing (QE) is the Federal Reserve's program of buying bonds from its member banks. The purpose of this expansionary monetary policy is to lower interest rates and spur economic growth.

The Fed purchases U.S. Treasury notes and mortgage-backed securities (MBS). It issues credit to the banks' reserves to buy the bonds.

Where does the money come from to purchase these assets? The Fed has the ability to simply create it. This unique ability is a function of all central banks. It has the same effect as printing money.

Quantitative easing is a massive expansion of the Fed's normal open market operations. Even before the recession, the Fed held between $700-$800 billion of Treasury notes on its balance sheet, varying the amount to tweak the money supply. The asset purchases are done by the Trading Desk at the New York Federal Reserve Bank.


The Fed adds credit to the banks' reserve accounts in exchange for MBS and Treasuries. The reserve account is the amount that banks must have on hand each night when they close their books. The Fed requires that around 10% of bank deposits be held either in cash in the banks' vaults or at the local Federal Reserve bank. For more, see Reserve Requirement.
When the Fed adds credit, the banks have more than they need in reserves. They now have more to lend to other banks. As banks try to unload their extra reserves, they drop the interest rate they charge. This is known as the Fed funds rate. This rate is the basis for all other interest rates. (Source: Federal Reserve Bank of San Francisco)

Such action of the Federal Reserve increases the money supply because lower interest rates allow banks to make more loans. Bank loans stimulate demand by giving businesses more money to expand, and shoppers more credit to buy things with.

So, as you say, all these money certainly finds its way in the system with the public. Also, Keynes too has tightly said that you should spend your way through recession. The spending will fuel demand and this demand will absorb the supply and ultimately recession goes away. And to spend, Fed, through it various measures, gives these monies to the people.

I hope this helps,

You may rate this positively, or revert back with further assistance if required.

Warm Regards
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Customer reply replied 4 years ago

In your first paragraph, are member banks the same as primary dealers or do the primary dealers deposit the sales proceeds into member banks and thus increase the reserves of the member banks?


 


If primary dealers are not banks and in fact are the ones who sell securities to the Fed, What would happen if the dealers buy assetts instead of deposit the proceeds?

Dear Friend,

Hello and welcome again. Thank you for your follow up question.

The primary dealers are same as member banks.

I hope this helps,

You may rate this positively, or revert back with further assistance if required.

Warm Regards
Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 4,545
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