Author Topic: How Long Can Fed Buy Everything?  (Read 3781 times)


  • Full Member
  • ***
  • Posts: 132
Re: How Long Can Fed Buy Everything?
« Reply #30 on: May 24, 2020, 05:24:00 AM »
Just finished watching the recent full interview with Druckenmiller.

IMO the best quote which summarises my own issue with the Fed's actions: "the Fed is there to solve a liquidity problem...they are not solving a solvency problem."


  • Hero Member
  • *****
  • Posts: 701
Re: How Long Can Fed Buy Everything?
« Reply #31 on: May 26, 2020, 08:01:53 AM »
To me it looks like Fed and Treasury seems to be working very well together. Fed is indirectly funding the Treasury. Since Treasury cannot all the bonds that it wants to sell without higher yields, Fed is buying them.

Vinod, the US Treasury is having no problem selling US Treasury Bonds to the public and doesn't need the Fed to buy any of them (in fact, the Fed is prohibited from buying any of the Treasury's debt directly - it must buy the debt from the open market).  The Fed is buying them for its own purposes. 

That's why I used the example in an earlier post about how the Fed, in carrying out its QE program, is converting long-term US Treasury debt issued at fixed and low yields at issuance into short-term reserve liabilities of the Fed at variable yields that could go a lot higher than the yields of the bonds the Fed just purchased.  If you combine the interest expense paid by both the Fed and the US Treasury as basically federal government spending - the "savings" are being dissipated.

So in total, they are un-coordinated since the Fed is partially reversing the debt management strategy of the US Treasury.


Wabuffo - Thanks for the posts.  You seem to really understand how the Fed works. 

How do you think this plays out with the Fed over time with secondary consequences?

I don't understand squat with this stuff.  How did you learn this stuff and could you recommend some books or articles on this?
Thank You


  • Sr. Member
  • ****
  • Posts: 465
    • Twitter
Re: How Long Can Fed Buy Everything?
« Reply #32 on: May 26, 2020, 08:56:22 AM »
How did you learn this stuff and could you recommend some books or articles on this?

This is a good podcast on the Fed and central bank monetary operations.  It was recorded before the repo mess in Sept and the current crisis but its a good overview of the Fed and US Treasury's actions during and after the GFC.

The Fed's website also has a lot of good background as well.  You should familiarize yourself with the H.4.1 report as well as the US Daily Treasury Statement.  They connect at the US Treasury's General Account balance every week.

Hope this helps - I'm a bit of nerd for this kind of stuff.  If you have any further questions, I could try to answer them - though I'm always learning too.



  • Jr. Member
  • **
  • Posts: 57
    • Split Rock Capital Management, LLC
Re: How Long Can Fed Buy Everything?
« Reply #33 on: May 28, 2020, 07:16:00 AM »
  The more the Fed balance sheet grows, the less safe, liquid assets exist for the rest of us.  I don't see how that helps the private sector and I think it actually hurts it.

The reality is that the Fed isn't the major factor in money creation since it can only lend via swapping assets for bank reserves.  It is the US treasury and its deficit spending that is the major money creator.  All of the attention on the Federal Reserve is misdirected. 

It also shows how disjointed monetary operations are when you have two players (the Fed and the US Treasury) that often work at cross-purposes and neutralize each other.


In my opinion, the private sector is helped if the Fed is clear about its intention to swap lower interest bearing reserves with higher interest bearing treasuries etc.  If they do this consistently enough, the only option for the commercial banks to "rerisk" their balance sheets and make more loans (which increase Nominal GDP)

George Selgin talks about how even in the weimar republic, the banks were able to get rid of excess reserves.  Of course our post 2008 world is different because central banks are paying interest on reserves. But this isn't any technical failing of monetary policy.  The failure is paying interest on reserves, which is self inflicted and has kept NGDP below trend since 2008 and led to a subpar recovery

"“This is another argument I’ve had with Fed economists. I wrote to the Fed and said: ‘look, you’ve
got it wrong. There is a distinction between the determance of excess reserves and the determance
of reserves. It’s not the same. Banks can, in principal, always have low excess reserves by creating
enough deposits.’ His (a Fed economist) response was: ‘well, when the magnitude of deposit
creation is such, as it was under all three rounds of Q.E., then it’s no longer possible for banks to
make that many loans. There’s not enough loan possibilities out there.’ And I wrote him back and
said: ‘well excuse me, but in the German hyperinflation, the order of magnitude of increase of
bank reserves was many times greater than in Q.E., as fantastic as Q.E. was. Yet, not only did the
German banks expand deposits as rapidly as reserves and keep the same low ratio of reserves...the
German banks actually lowered their reserve ratios. They created more deposits. They’re always
able to get rid of non-interest earning reserves as long as there are other assets that earn more
interest’…He didn’t have an answer to that”

(Source w/ time stamp: )
« Last Edit: May 28, 2020, 07:18:10 AM by JimBowerman »