How does the fed add liquidity to the economy?

morganist · Sep 11, 2020

morganist said:
I have been reflecting on your comments on this thread and would like to make some distinctions to clarify my position on the issue.

Monetary base is the currency in all forms that can be used to make transactions with. Money supply is the currency available to make transactions with that can be used cumulatively to produce the level of demand. Aggregate demand or aggregate expenditure is the cumulative total of transactions the money supply has generated at a specific period of time and GDP is the annual total of cumulative transactions that have been made with the money supply.

This is my issue with this whole FED money value argument you have been raising. The monetary base is something which is controlled to maintain a currency's value. It has a value in itself without having to be backed up with anything (although it can support the currency value if it is backed up by something) purely from the fact that currency in itself is something that has a value and is traded on an exchange. This is the backing currency has people buy it.

The monetary base and its controlled value is something people buy as a commodity of purchase, people buy the currency's ability to purchase goods at a later date. Maintenance of the currency's supply through the control of the monetary base and limitation of its quantity is an aspect of currency control that gives it value. The issue you are more looking at when you see the FED increasing demand in an economy is an increase in money supply unless it is QE.

There has been a movement when people started buying the currency on the international FOREX market that the currency became the commodity and validated it as a thing of value. The FED's responsibility is to maintain its value by controlling its quantity. The next aspect of the FED's responsibility is to enable more transactions or to control aggregate prices through managing the money supply, the money that is available to make transactions with.

The FED has many opportunities to do this without having to alter the monetary base and compromise the currency's value. There is still another risk that you are stumbling on, which is also damaging to a currency's value. The process of expanding the money supply may involve using the monetary base (which is as a currency that is traded and valuable in its own right) as an asset used to back up the money supply and the transactions it is used to make.

It is like the FED is hypothecation or rehypothecation against the currency as an asset when it expands its money supply, when it is done by expanding credit. If what you claim is occurring when the interest rate is reduced and the FED lends more money out or exchanges cash for commercial bank assets it might be impacting the monetary base or currency's value, which can be another form of currency devaluation or impact the currency's trading value.

I am seeing a lack acknowledgement to the value of the currency in this thread, which is the fact that it is a commodity traded on a international exchange. This is what the FED is managing, the currency's own value in trade. The other aspects of the FED's operations are to hit economic targets or maintain financial stability. My concern and what I feel you are missing is the act of hypothecation or rehypothecation the currency when credit is expanded.

This might be the thing you are all arguing about but not appreciating because you are all still trying to find the object of currency value. THE CURRENCY HAS A VALUE IF IT IS TRADED ON AN EXCHANGE. My concerns are that the FED's operations might devalue the currency's value on the exchange and that the expansion of credit, if the currency is used as a collateral asset, could reduce the value of the currency and damage its purchasing power internationally.
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I would like to elaborate further on the post above to explain how central banks classify the money supply. They use a division in the form of money dependent on the liquidity of the assets. They start at either M0 or M1 and move up to M4 in some cases. The most liquid assets are included in the M0 or M1 and the least liquid assets are included in the higher M classifications. This is important to point out because it explains the different liquidity levels of the money supply and how the central bank operates using them. Read the link below.

https://www.investopedia.com/terms/m/monetarybase.asp

This is the point I really want to make. M0 or M1 are the liquid cash assets that are traded on the FOREX market. It is not the bonds or the treasuries or the less liquid assets. It is the cash assets and transaction currency units that banks, consumers and business hold when they want to buy another currency that is traded on the FOREX market to exchange for the other currency they want to buy goods from abroad with. This is the point I am trying to make, the currency's value is the monetary base or active money supply M0 or M1 that backs the FED.

This is the commodity the FED has control of that has a value in itself and is traded, that it produced itself. The other assets the FED has are bought. The currency is its own creation and its own asset. The bonds, long term deposits and other none transaction active assets were not made and controlled by the FED. Even the value of the other assets the FED holds are affected by this currency commodity. Say the currency value traded on the FOREX drops the value of the other FED assets will drop as much as the currency, which the FED controls.

The other FED owned assets values are backed up by the active transaction currency's value. Any alteration the FED makes that impacts the value of the dollar on the FOREX market will impact the international value of the assets the FED holds on its balance sheet. The whole value of everything that is dollar based is backed up by the M0 and M1 operations and values. I feel an expansion of credit used by the FED to increase economic growth can be counterproductive against the value of the rest of the assets held on the FED's balance sheet.

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How does the fed add liquidity to the economy?

morganist Guest