Clarification needed – Treasury Bonds

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  • Sat, Dec 20, 2008 - 06:25pm

    #1
    gkneller

    gkneller

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    Clarification needed – Treasury Bonds

@ 1:24 –

"Money is created by this next mechanism, where the Federal Reserve buys a Treasury Bond from a bank. When the Fed does this, they simply transfer money, in the amount of the bond, to the other bank and take possession of the bond. A bond is swapped for money. Now, where did this money come from? Glad you asked. It comes out of thin air, as the Fed creates money when it buys this debt. New Fed money is always exchanged for debt. and so now we can put the title on this page: All Dollars Are Loaned Into Existence."

Is this saying that the Federal Reserve is buying back its own bonds from the bank, or those that have been issued by another country? Does this even matter? I feel dumb for asking, but I’m missing something here. If they’re creating money from nothing, why bother going through all the hassle of buying debt from banks? Why not just issue the new money directly to Congress and have done with it? I think I understand how it works, but I don’t understand WHY it has to be this way, and what the advantage is. Any help would be greatly appreciated (and even more appreciated if the answers could be kept fairly simple – this stuff is all very new to me!).

Many thanks to everyone who was involved in making this series. I’m finding it fascinating, and it’s already helped me understand some things I’ve been wondering about for years.

  • Sat, Dec 20, 2008 - 07:12pm

    #2
    rrabbit

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    Re: Clarification needed – Treasury Bonds

You are confusing the Federal Reserve (the US central banking entity, which is somewhat similar to the Bank of England in the UK, or the European Central Bank in the EU) with the US Treasury Department. US treasury bonds are a debt of the US Federal government, not a debt of the Fed.

  • Thu, Jan 12, 2012 - 01:09am

    #3
    Peak Prosperity Admin

    Peak Prosperity Admin

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    Where does interest come into play?

I am confused at this point as well.

Congress tell the treasury to raise money. The treasury then creates bonds and sells them to the banks with the promise of a 5% return plus the facial value of the bond.

The Federal Reserve then prints money (or creates it out of thin air) and gives the banks this money for the bonds. What happens here? Does the Fed buy those bonds from the bank including the 5% interest that was promised to them by the Treasury or does it simply buy the bonds at the face value and the bank still collects the 5% from the Treasury? In other words who gets the interest for the bonds now the bank or the Fed?

 

My next question is that it was stated that the treasury doesnt have much money on hand at any given time. It only has a couple of weeks worth of money. Where is it getting the couple of weeks worth of money that it does have? Where exactly does that come from? 

  • Thu, Jan 12, 2012 - 01:09am

    #4
    Peak Prosperity Admin

    Peak Prosperity Admin

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    Where does interest come into play?

I am confused at this point as well.

Congress tell the treasury to raise money. The treasury then creates bonds and sells them to the banks with the promise of a 5% return plus the facial value of the bond.

The Federal Reserve then prints money (or creates it out of thin air) and gives the banks this money for the bonds. What happens here? Does the Fed buy those bonds from the bank including the 5% interest that was promised to them by the Treasury or does it simply buy the bonds at the face value and the bank still collects the 5% from the Treasury? In other words who gets the interest for the bonds now the bank or the Fed?

 

My next question is that it was stated that the treasury doesnt have much money on hand at any given time. It only has a couple of weeks worth of money. Where is it getting the couple of weeks worth of money that it does have? Where exactly does that come from? 

  • Thu, Jan 12, 2012 - 01:09am

    #5
    Peak Prosperity Admin

    Peak Prosperity Admin

    Status Bronze Member (Offline)

    Joined: Oct 31 2017

    Posts: 1611

    count placeholder

    Where does interest come into play?

I am confused at this point as well.

Congress tell the treasury to raise money. The treasury then creates bonds and sells them to the banks with the promise of a 5% return plus the facial value of the bond.

The Federal Reserve then prints money (or creates it out of thin air) and gives the banks this money for the bonds. What happens here? Does the Fed buy those bonds from the bank including the 5% interest that was promised to them by the Treasury or does it simply buy the bonds at the face value and the bank still collects the 5% from the Treasury? In other words who gets the interest for the bonds now the bank or the Fed?

 

My next question is that it was stated that the treasury doesnt have much money on hand at any given time. It only has a couple of weeks worth of money. Where is it getting the couple of weeks worth of money that it does have? Where exactly does that come from? 

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