Clarification needed - Treasury Bonds

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gkneller's picture
gkneller
Status: Member (Offline)
Joined: Dec 20 2008
Posts: 1
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.

rrabbit's picture
rrabbit
Status: Member (Offline)
Joined: Dec 20 2008
Posts: 7
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.

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