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Reply #27: Money supply would be unchanged. [View All]

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girl gone mad Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 07:18 PM
Response to Reply #24
27. Money supply would be unchanged.
Edited on Sun Jul-31-11 07:34 PM by girl gone mad
Dollars are traded for Treasury bonds. Since Treasury is buying back the bonds, not the Fed, the debts get canceled.

The market for Treasury bonds is already extremely liquid. Bondholders can sell their bonds to any of 23 dealers virtually any day of the week. One has to assume from this fact that the bondholders' money is not being involuntarily tied up (i.e. this is money they are intentionally saving and plan to keep saving).

ETA: When a bondholder sells to a bond dealer, the dealer creates money out of thin air using the bond as leverage to credit the bondholders reserve account. That results in an increase in the money supply. This is another reason why the coin seigniorage plan is deflationary. When these securities are canceled, dealers will have less leverage to use for credit creation in the money markets.
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