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... is that the Fed buys and sells Treasury securities on the secondary market to inject or drain reserves from the system and regulate the cash rate (cost of funds to banks), and the interest is what makes the private market for the Treasury securities.

The interest is handed back when the Treasury securities are in the hands of Fed. That is called "monetising" the debt because when when the Fed acquires additional Treasury securities, that is accounted as an asset, and the FRB can increase its liabilities by an equal amount, which is the creation of new Federal Reserves. So the debt basically goes back inside the fourth, oddly organized, branch of government and is replaced by high power money that can circulate as cash or be leveraged by commercial banks into ten to twenty times as much bank account money.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Oct 15th, 2010 at 10:34:18 AM EST
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