Money supply is now contracting

[charliebrown]

Re: Money supply is now contracting

confused. How can treasuries be used to buy stuff? I understand if they wind up at the fed and are monitized then money is created. Treasuries are sold by the treasury for cash. The person who surrenders the cash for the treasury cannot spend it. I suppose this may increase the velocity of money as the government will spend the money into the economy immediately.

Once again, if the treasuries are bought by a bank as an asset, the bank can use fractional reserve lending. but wait, if the bank is using its cash, to buy cash is an asset too.

Now if the banks trade in their damaged MBS for treasuries, the treasuries count more toward capital than the MBS thus increasing their lending power.

Now you see my thought processes, what am I missing?

[bpr]

Re: Money supply is now contracting

confused. How can treasuries be used to buy stuff?

Really good question, but I can see two ways:

1. This way:

Once again, if the treasuries are bought by a bank as an asset, the bank can use fractional reserve lending. but wait, if the bank is using its cash, to buy cash is an asset too.

Remember, the bank can borrow at a lower rate from the Fed to cover any reserve requirement not met, so treasuries are cash in that they facilitate the process of money creation.

2. Treasuries act as an ultra-high-denomination US Dollar. When Acquiring Company A buys out Target Company B for 50 million shares of Acquiring Company A and $2 Billion cash, there is one transaction for the shares, and one transaction for the cash. The cash is in Treasuries, not US Dollars per se.

I may be wrong here, but this is how I understand it:

Security : Futures Option
US Treasury : US Dollar

[bart]

Re: Money supply is now contracting

confused. How can treasuries be used to buy stuff? I understand if they wind up at the fed and are monitized then money is created. Treasuries are sold by the treasury for cash. The person who surrenders the cash for the treasury cannot spend it. I suppose this may increase the velocity of money as the government will spend the money into the economy immediately.

Once again, if the treasuries are bought by a bank as an asset, the bank can use fractional reserve lending. but wait, if the bank is using its cash, to buy cash is an asset too.

Now if the banks trade in their damaged MBS for treasuries, the treasuries count more toward capital than the MBS thus increasing their lending power.

Now you see my thought processes, what am I missing?

I obviously goofed and over-simplified.

What I'm looking at regarding "treasuries be used to buy stuff" is only that portion of new Treasury debt that is either monetized directly by the Fed and their possible hidden agents or indirectly by other Central Banks (or technically the IMF via SDRs). The adjustments I've made for double counting include an attempt to only count newly created money. One direct example of newly created money is the $300 billion of debt that was monetized by the Fed last year via POMOs (Permanent Open Market Operations) and that is also reflected in the SOMA (System Open Market Account) balance.

There's also an implied monetization going on when those damaged MBS' you note are bought at full value by the Fed, and some of it falls under the derivatives portion of my chart.

One last point, just in case - potential fractional reserve factors don't play any direct role in that chart.