To: Pokey78
efforts of the Federal Reserve, which has been a busy little beaver this year (especially since 9/11). The basic liquidity measure controlled by the Fed, the monetary base, has expanded by 9% year-to-date. Last year it deflated by 3% How were they able to do that?
13 posted on
11/27/2001 7:39:38 AM PST by
bvw
To: bvw
One way the Fed can affect the monetary base is by buying and selling its bond holdings into the secondary market. If the Fed sells a bond, it 'sops up' liquid money by exchanging an illiquid bond for it. This has a deflationary effect on the monetary base. And if the Fed buys a bond, it expands the monetary base by "creating" cash to exchange for the bond. Essentially the Fed is effecting the monetary mix, changing it from cash to bonds, bonds to cash. During the Carter years the Fed was buying bonds directly from the Treasury, in the "primary" market. This is called "monetizing the debt", and it's highly inflationary. Which is why the Fed must now buy only in the secondary market.
18 posted on
12/29/2001 12:18:13 AM PST by
Pelham
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