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Politics : PRESIDENT GEORGE W. BUSH
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To: nihil who wrote (26157)7/28/2000 8:57:38 AM
From: Zoltan!  Read Replies (2) of 769667
 
>>Wrongo! A "rapid increase in money supply" is caused by increased selling of securities rather than borrowing.

Wrongo is right. You have it exactly backwards. In Open Market Operations, Fed purchases of gov securities increase bank reserves, which boosts money supply. Fed sales decrease reserves and the money supply.

Of course when the Fed buys or sells government securities, it has no assurance that a commercial bank will be the other party in a transaction. But it doesn't really matter much whether the securities the Fed buys are being sold by a commercial bank or by someone else. In either case, when the Fed sells bank reserves go down and when it buys bank reserves go up.
- Principles of Money, Banking and the Financial Markets by Lawrence S. Ritter & William L. Silber
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