Does the Fed create money buy buying government bonds?
Wow dude, take a breather. Here’s the deal: 1. You deposit $1,000 at your bank. They do not hoard that currency in their vault. The bank must get a return on that money, so the bank will 1) loan it out, which it can do if it has cash on hand, or 2) make a short term investment in gov’t bonds, keeping the bonds as an interest-paying asset. 2. The bank can lend cash, but it cannot lend the bond. Therefore, its bond holdings naturally limit how much money the bank can lend at any time. 3. The Fed buys and sells these gov’t bonds to banks in order to control the money supply. (The Fed has cash on hand just from being the government’s banker and through it’s ongoing business. But the Fed can create money itself when necessary). 4. When the fed wants to INCREASE the money supply, the Fed will purchase some of those bonds from a bank — the Fed trades cash to the bank for the bonds. 5. The bank now has more cash on hand, so the bank does what banks do with cash — it’ll lend it out to a custo
