21 sats \ 2 replies \ @Bell_curve 4 May \ parent \ on: These are the people that run us. meta
I’m not sure about point 3.
When the bond matures the money supply remains constant?
Treasury pays interest and principal. The interest payments prevent shrinkage?
Regarding point 2 the counterweight is theoretical because of accounting gimmicks
You are correct that in any case where an outside investor held the bond, this does not cause any direct shrinkage of money supply. This is probably the "normal case".
However, in the case that it was the Fed itself holding the bond, then the payoff will cause a reduction in its balance sheet.
As an example, lets assume a scenario where there is $0 in circulation:
- US Treasury issues a bond for $100
- Fed conjures $100 in Federal Reserve Notes into existence and buys bond with that.
- US Treasury now has $100 and it spends that into economy, total money supply is $100
- At this moment, the Feds Balance Sheet is: Assets $100 US Bonds / Liabilities $100 FRN
- After some time, the US Treasury pays off bond. Now the balance sheet of the Fed is Assets $0 / Liabilities $0
- In order to issue more money into circulation, the Fed must have some Asset on its Balance Sheet to issue Federal Reserve Notes against, thus another Asset is needed, so for the time being that money is taken out of circulation.
This is all of course theoretical, since the US never pays off its debt anymore. They simply rollover existing debt with new debt. I was simply trying to make the best case for the system - pretending to be a defender of it.
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Good explanation
I like simple theoretical examples.
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