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The Spaniard

Comparing The Fed And The Boe

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Timm suggested on the excellent Gilts Thread that we move our intrusive discussion to a new thread of its own, and I agree, with apologies to Free Trader etc.

I'll start off with something that I would like to get absolutely clear, if possible:

In general (excepting seigniorage on cash) HM government raises money by auctioning Gilts into the market. Thus money already in existence is moved from the buyer of the Gilts to HM Treasury and M4 is not increased.

Conversely, I understand that the Fed issues new money when it buys US Treasuries, thus expanding the money supply. Is this true? What is the exact role of the "primary dealers"?

Edited by The Spaniard

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In general (excepting seigniorage on cash) HM government raises money by auctioning Gilts into the market. Thus money already in existence is moved from the buyer of the Gilts to HM Treasury and M4 is not increased.

Conversely, I understand that the Fed issues new money when it buys US Treasuries, thus expanding the money supply. Is this true? What is the exact role of the "primary dealers"?

I don't know much about the US system, but are these not two different issues?

From a UK perspective, the first is Government borrowing, whilst the second is QE, or an Open Market Operation.

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I don't know much about the US system, but are these not two different issues?

From a UK perspective, the first is Government borrowing, whilst the second is QE, or an Open Market Operation.

I'll try to be more clear:

How does (did?) the US Government usually (before QE) sell its IOUs?

Does it sell them for new money (specifically issued by the Fed for the purchase) or for pre-existent money?

Does the process expand the money supply or not?

What is the precise role of the primary dealers?

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I'll try to be more clear:

How does (did?) the US Government usually (before QE) sell its IOUs?

Does it sell them for new money (specifically issued by the Fed for the purchase) or for pre-existent money?

It sells them into the market for money that already exists.

Does the process expand the money supply or not?

No.

What is the precise role of the primary dealers?

I don't know. They would probably say "to maintain stability"

We hear a lot about the Fed buying securities from the market for dollars printed from thin air, but does anyone know how much this actually happens? If so, how does the period pre crunch compare with the period post crunch?

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To keep pushing for an authoritative and convincing explanation:

My present working hypothesis is that, because it is both privately owned and a CB, the Fed can expand its balance sheet by lending newly issued (narrow) money in exchange for a Government IOU. This raises the question of which entities can receive and hold this narrow money, presumably a requirement to be able to sell the Government IOUs to the Fed. In other words the Fed pays in narrow money and only certain authorized entities can receive such narrow money.

I'd appreciate a nitty-gritty blow-by-blow account of the whole process, in particular the role of the primary dealers.

Are they the intermediaries who can receive the newly issued narrow money from the Fed, having themselves purchased the new IOUs from the US Treasury for pre-existent broad money?

Edited by The Spaniard

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To keep pushing for an authoratitive and convincing explanation:

My present working hypothesis is that, because it is both privately owned and a CB, the Fed can expand its balance sheet by lending newly issued (narrow) money in exchange for a Government IOU. This raises the question of which entities can receive and hold this narrow money, presumably a requirement to be able to sell the Government IOUs to the Fed. In other words the Fed pays in narrow money and only certain authorized entities can receive such narrow money.

I'd appreciate a nitty-gritty blow-by-blow account of the whole process, in particular the role of the primary dealers.

Are they the intermediaries who can receive the newly issued narrow money from the Fed, having themselves purchased the new IOUs from the US Treasury for pre-existent broad money?

Here's my understanding for what it's worth.

The US Treasury finances its budget deficit by issuing US Treasuries (the US equivalent of gilts). Those treasuries are sold at auction. At the auction the primary dealers are obliged to bid for the whole amount of the treasuries being auctioned ie a treasury auction can never technically 'fail' because the primary dealers have an obligation to buy them all. Bids can also be made by indirect bidders (which used to be code for foreign governments but now isn't - although the level of indirect bids is often still trumpeted as evidence that foreigners still have an appetite for US debt).

The Fed is not permitted to buy treasuries directly at the auctions. It is however permitted to buy them later on from anyone who bought them at the auction. It therefore creates money to buy those treasuries and when it announces which ones it wants to buy anyone who wishes to sell can offer them to the Fed.

The QE bit is therefore when the Fed creates money to buy the treasuries. It's the same mechanism as the BoE buying gilts. It increases the money supply because rather than just having the treasuries in circulation, you have the treasuries plus the money created to buy them.

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I think this is correct. Keep in mind though that the Fed creates only a small portion of the money supply. Most is created by the commercial banks.

As you know, I'm not an economist -- if I have to categorize myself other than a humble reporter, I call myself a monetary historian -- so I am about to venture into dangerous waters about which I know little. That being said, interestingly, in the last "auction" there were initially no bidders for some period of time. Then the primary dealers suddenly bought it all. Why? 10 days later, the Fed bought 47% of it back. This pumps new money into our system, while giving the appearance that our Treasuries are desirable.

Prof. Buckner from Columbia Univ. explained yesterday on the Glenn Beck Show. Here is the link: then under "Wednesday, August 12" click on "Hyperinflation Fears".

Oops, forgot the link.

http://www.foxnews.com/glennbeck/index.html

Bill

Here's my understanding for what it's worth.

The US Treasury finances its budget deficit by issuing US Treasuries (the US equivalent of gilts). Those treasuries are sold at auction. At the auction the primary dealers are obliged to bid for the whole amount of the treasuries being auctioned ie a treasury auction can never technically 'fail' because the primary dealers have an obligation to buy them all. Bids can also be made by indirect bidders (which used to be code for foreign governments but now isn't - although the level of indirect bids is often still trumpeted as evidence that foreigners still have an appetite for US debt).

The Fed is not permitted to buy treasuries directly at the auctions. It is however permitted to buy them later on from anyone who bought them at the auction. It therefore creates money to buy those treasuries and when it announces which ones it wants to buy anyone who wishes to sell can offer them to the Fed.

The QE bit is therefore when the Fed creates money to buy the treasuries. It's the same mechanism as the BoE buying gilts. It increases the money supply because rather than just having the treasuries in circulation, you have the treasuries plus the money created to buy them.

Edited by bill still

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the BOE are buying the UK government gilts/bonds

the FED are buying the US treasuries, billions of them, every week and every month.

Banks are making record profits from the Spread :

http://www.ft.com/cms/s/0/e84383dc-7f8c-11...0b5df10621.html

They're stealing from the people (rising prices in supermarket are the result of this money creation) and giving it to the Bankers.

outright theft and looting.

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To paraphrase Winston Churchill:

I cannot forecast to you the action of the Bank Of England.

It is a riddle wrapped in a mystery inside an enigma.

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Guest UK Debt Slave
To paraphrase Winston Churchill:

I cannot forecast to you the action of the Bank Of England.

It is a riddle wrapped in a mystery inside an enigma.

In a seseme seed bun! :lol:

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Guest UK Debt Slave
the BOE are buying the UK government gilts/bonds

the FED are buying the US treasuries, billions of them, every week and every month.

Banks are making record profits from the Spread :

http://www.ft.com/cms/s/0/e84383dc-7f8c-11...0b5df10621.html

They're stealing from the people (rising prices in supermarket are the result of this money creation) and giving it to the Bankers.

outright theft and looting.

Your 4 words says everything that needs to be said.

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Outright theft and looting..

It is happening right now, before our eyes...and the msm actually applaud it all.

So we are totally powerless as taxpaying (or not) individuals to have any influence whatsoever on anything that matters...so what is the point of a democracy?

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Guest UK Debt Slave
Outright theft and looting..

It is happening right now, before our eyes...and the msm actually applaud it all.

So we are totally powerless as taxpaying (or not) individuals to have any influence whatsoever on anything that matters...so what is the point of a democracy?

What more needs to be said?

There is no democracy

That is the most shocking conclusion of all

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What more needs to be said?

There is no democracy

That is the most shocking conclusion of all

Scary, but oh so true.

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