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Strategies & Market Trends : Heinz Blasnik- Views You Can Use -- Ignore unavailable to you. Want to Upgrade?

To: LLCF who wrote (397)	4/22/2003 3:47:57 PM
From: GraceZ	Read Replies (1) \| Respond to of 4914

Let's review just how money gets into the system. When the Fed buys securities, does a coupon pass, they hold the security in their account and they write a check which then gets deposited into the account of the bank that sold them the security. This is permanent creation and it adds to the fractional reserves that the bank can base it's lending on. The bank could have raised reserves by simply selling those securities on the open market, but that doesn't increase the money stock because the money paid for them simply comes from the reserves of another bank. When the Fed pays, it's created money, it's what one refers to as monetizing debt. A bank doesn't sell securities to the Fed only to have these reserves sitting in their Federal reserve account. They need to put them to work. If they aren't making loans on their reserves they would put them to work by holding the debt securities instead of selling them to the Fed. In the absence of loan demand, the Fed can't get those permanent creations out there. They have reduced coupon passes to a trickle in the past year. In the last year, the Fed's open market operations have been almost exclusively RPs which are temporary infusions designed to keep the market for money at their interest rate target. There are always short term demand and supply adjustments made in response to short falls and surpluses in bank reserves. Because the RPs aren't permanent they are never used to make loans but to resolve temporary short term changes in reserves that if left to the open market for money might result in overnight rates or FFs rising above the interest rate target. Currency as a fraction of the monetary aggregates rises and falls as the public either demands more or less currency. Physically printing dollars isn't adding permanent (even though they are "permanent" enough to last a long time in circulation). When currency is printed it is simply in response to people demanding currency for money that already exists. All it does is turn what was a demand deposit (which has already been counted in the money stock) into currency. Like at Christmas, when people like to give cash as presents because it looks nicer then a check, there is an added demand for currency but this doesn't make a permanent addition to the monetary supply it simply replaces what was previously an electronic entry into cash.