<blockquote>
<p>Can the Federal Reserve permanently decrease money supply?</p>
</blockquote>
<p>Yes it can.</p>
<p>For example, if Fed created extra \$1000 by buying \$1000 US bond or treasury bill in exchange for newly created money, then Fed can always reverse this process by either just waiting for the bond to be repaid. When the face value of bond is being repaid government has to somehow pull \$1000 from the economy and send it back to the Fed. At that point the bond and money are destroyed.</p>
<p>Also, I am not sure if I understand your example. Generally speaking, repaying debt destroys money supply, issuing more debt increases the money supply.</p>

CC BY-SA 4.0
2021-10-26T09:15:30.433Z
The words "Generally speaking, repaying debt destroys money supply, issuing more debt increases the money supply" are misleading in the context of this question because it implies symmetry. Whereas in fact the creation of money via Fed purchasing bonds is inherently temporary (i.e. the money disappears when the bonds reach maturity) whereas the destruction of money via the Fed selling bonds is inherently permanent (i.e. the money remains in the economy after maturity).
Mick
CC BY-SA 4.0
2021-10-26T09:24:51.163Z
@Mick what you say is simply false 1. First the statement is factually correct - money supply can only be recorded for given time period, like 2009 - as all other aggregates. That would be like saying statement that spending generally increases GDP is incorrect because GDP thousand years from now is not affected by present spending. 2. Fed has always an option to write off the government bonds without collecting on them. So fed can always choose to make any money increase in money supply permanent, even though it most often chooses not to do that as that unnecessarily constrains its own policy
1muflon1
CC BY-SA 4.0
2021-10-26T10:40:30.753Z
Re: "Fed has always an option to write off the government bonds without collecting on them." - I thought there were laws against that sort of thing: e.g. https://en.wikipedia.org/wiki/Debt_monetization#Legal_prohibitions_against_monetary_financing
Mick
CC BY-SA 4.0
2021-10-26T10:43:58.017Z
@Mick that law is about **direct purchasing of gov bonds** fed can still purchase that bond on secondary market and then tear the bond so it never needs to be collected.
1muflon1
CC BY-SA 4.0
2021-10-26T11:15:29.747Z
I have not read the fine print of the banking act of 1935, but it would pure madness if the Fed could circumvent it so easily. I don't believe for a second they could do it.
Mick
CC BY-SA 4.0
2021-10-26T11:46:41.423Z
@Mick 1. Just google balance sheet of fed and you will see they hold US treasuries. It is also common knowledge they do hold the debt and you can read about that in literally any 101 textbook so I am surprised you are surprised by it. 2. This is not circumventing the act. Government has to still sell first bonds to primary buyers who then sell it to central banks - this is to create imaginary wall between treasury and central bank so they do not work directly together which helps to protect central bank independence
1muflon1
CC BY-SA 4.0
2021-10-26T12:00:24.733Z
I know the Fed hold government bonds - there is no surprise. But I still don't believe that the Fed would or could decide not to collect coupon or principal payments on a government bond. Has there been a single example since 1935?
Mick
CC BY-SA 4.0
2021-10-26T13:01:15.077Z
@Mick 1. It is 100% possible here you have some article discussing it, and there are many economists such as Picketty advocating that is what central banks should do it https://www.google.nl/amp/s/www.bloombergquint.com/amp/opinion/central-banks-cancelling-government-debt-is-no-panacea. The article is for ECB but there are Fed proposals floating around as well 2. I am not aware of Fed doing that in the past since obviously Fed does not want to take irreversible actions but Fed never did QE before 2009 also and now it does it regularly.
1muflon1
CC BY-SA 4.0
2021-10-26T13:11:40.137Z
Yes, some people would like the Fed to do it, and maybe it's a good idea - but it would require changing the law (or simply breaking it!).
Mick
CC BY-SA 4.0
2021-10-26T13:13:01.090Z
@Mick please give me link to a law that says Fed is prohibited from **writing off some of its assets**. There isn’t such law. The law you linked previously was about Fed being able to directly purchase government bonds. If you will give me link to such law I will concede
1muflon1
CC BY-SA 4.0
2021-10-26T13:20:43.520Z
It would take too much time to find. Besides, generally when you see a law banning doing X directly, you would normally expect X to also be banned even if doing it indirectly.
Mick
CC BY-SA 4.0
2021-10-26T13:36:01.483Z
@Mick 1. “it would take too much time to find” <- it would take infinite time because it does not exist. 2. But that is fallacious argument. Literally you yourself just showed that doesn’t hold by showing that law that prohibits Fed buying government debt directly yet as you already above admitted and as it is widely known Fed is allowed to buy government debt indirectly on secondary markets. If anything the general rule of western jurisprudence with perhaps few exceptions is that what is not explicitly prohibited by law is allowed
1muflon1
CC BY-SA 4.0
2021-10-26T13:40:17.753Z
But the "X" is different between the tow cases... and that is the whole point of the law. It's to guarantee that the government pay interest on their bonds. Why would anyone make a law which is all about ensuring that the government pays interest on its bonds whilst simultaneously allowing a simple mechanism for the government to pay no interest and no principal?
Mick
CC BY-SA 4.0
2021-10-26T13:44:40.447Z
@Mick 1. What law you are talking about? 2. There are laws that force debtors to pay an interest and debt, but there are also laws allowing debt forgiveness and even defaults. If I lend you 100€ at 10% I can always as a creditor decide I forgive you the debt and you don’t need to pay anything or just forgive you part of it. You seriously never heard about debt forgiveness? 3. Both government and companies can default on their debt. Defaults can be selective government can default on foreign debt but not domestic or vice versa, it can default on any debt. Again you never heard about defaults?
1muflon1
CC BY-SA 4.0
2021-10-26T13:55:58.927Z
I don't have time to continue this. I'll just reiterate that there are laws in place designed to ensure that the government pays interest on its bonds and I will leave it to any reader to deduce everything else that might follow from that.
Mick
CC BY-SA 4.0
2021-10-26T13:59:40.563Z
@Mick I will reiterate basic well known facts that both debt forgiveness and defaults are allowed under US law and that there is no legislation that says Fed cannot write off some of the debts it holds and let any reader deduce everything else from that
1muflon1
CC BY-SA 4.0
2021-09-25T20:50:39.613Z
2021-09-25T20:50:39.613Z
1muflon1
<p>Imagine there is no Federal Reserve. It's easy if you try (because the Fed did not exist prior to about 1914). When the federal government operates in a world without the Fed the Treasury department would collect taxes, fees, and other receipts into commercial bank accounts due to the federal govt called Treasury Tax and Loan Accounts (TTL). The net sale of new Treasury bonds would sweep funds from bank deposit accounts into TTL and the net repayment of bonds would sweep funds from TTL back into bank deposits. If the government uses debt management to offset a deficit or surplus then it would sell bonds to cover the difference between spending and collections into TTL. The spending would increase bank deposits at the same rate that bond sales and collections drain bank accounts so the federal government would not increase or decrease deposits in the aggregate bank when it uses debt management to cover the deficit or dispose of the surplus. To dispose of the surplus the Treasury would just net redeem outstanding Treasuries rather than run up bank balances in its TTL accounts. The float of liquid Treasuries is then generated as an alternative financial asset to deposits which are highly liquid and short term Treasuries are highly marketable securities that keep par with bank deposits.</p>
<p>Suppose the federal government runs a persistent surplus. Then it would retire all outstanding Treasury bonds and be forced to increase its spending to offset collections or increase its bank account balance at the expense of those who transfer their account balance to the federal government on the books of the aggregate bank sector. This is like the King in Robin Hood who taxes the people to store up gold for the Crown. It would be bad public policy for the governments at any level to use tax policy to accumulate a large and growing bank account because that drains the financial savings of other sectors.</p>
<p>When the Fed exists it can buy or sell Treasuries and issue bank reserves also known as federal funds. The Fed should be considered to be the Monetary Authority of the Federal Government. The banks, Treasury, and so-called government-sponsored enterprises clear payments among each other using the liabilities of the Fed known as federal funds. The Treasury then has another account at Fed called the Treasury General Account (TGA) which it can use to spend, or to collect funds on the level of reserves, or transfer funds to TGA from TTL, etc. When the Treasury applies debt management this does not alter reserves or deposits in the aggregate bank sector to a first case approximation. The purpose of debt management by Treasury is to enable Fed to have control over monetary policy, using its balance sheet, without Fed having to increase the volume of its operations to offset the impact of Treasury if it did not use debt management to assist Fed.</p>

CC BY-SA 4.0
2021-09-26T00:44:51.110Z
2021-09-26T00:51:16.033Z
2021-09-26T00:51:16.033Z
SystemTheory
<p>As far as I understand it, the primary way the Federal Reserve decreases the money supply is by selling bonds–the entities buying these bonds give up their cash for them and thus M0 is decreased. However, aren't these bonds eventually settled, thus returning the money plus interest back to these entities and eventually increasing M0? If this is the case, can the Federal Reserve &quot;permanently&quot; decrease M0 and if so how?</p>

<money-supply><federal-reserve><nonexpert><bonds>
Can the Federal Reserve permanently decrease money supply?
lurning too koad
# Can the Federal Reserve permanently decrease money supply?

(Asked by: username_0 on 2021-09-25)

As far as I understand it, the primary way the Federal Reserve decreases the money supply is by selling bonds–the entities buying these bonds give up their cash for them and thus M0 is decreased. However, aren't these bonds eventually settled, thus returning the money plus interest back to these entities and eventually increasing M0? If this is the case, can the Federal Reserve "permanently" decrease M0 and if so how?

**Tags:** money-supply, federal-reserve, nonexpert, bonds


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## 2 answers

### Answer by username_1 on 2021-09-25. Score: 3

> Can the Federal Reserve permanently decrease money supply?

Yes it can.

For example, if Fed created extra \$1000 by buying \$1000 US bond or treasury bill in exchange for newly created money, then Fed can always reverse this process by either just waiting for the bond to be repaid. When the face value of bond is being repaid government has to somehow pull \$1000 from the economy and send it back to the Fed. At that point the bond and money are destroyed.

Also, I am not sure if I understand your example. Generally speaking, repaying debt destroys money supply, issuing more debt increases the money supply.

> **Comments:**
> **username_2**: The words "Generally speaking, repaying debt destroys money supply, issuing more debt increases the money supply" are misleading in the context of this question because it implies symmetry. Whereas in fact the creation of money via Fed purchasing bonds is inherently temporary (i.e. the money disappears when the bonds reach maturity) whereas the destruction of money via the Fed selling bonds is inherently permanent (i.e. the money remains in the economy after maturity).  
> **username_1**: @username_2 what you say is simply false 1. First the statement is factually correct - money supply can only be recorded for given time period, like 2009 - as all other aggregates. That would be like saying statement that spending generally increases GDP is incorrect because GDP thousand years from now is not affected by present spending. 2. Fed has always an option to write off the government bonds without collecting on them. So fed can always choose to make any money increase in money supply permanent, even though it most often chooses not to do that as that unnecessarily constrains its own policy  
> **username_2**: Re: "Fed has always an option to write off the government bonds without collecting on them." - I thought there were laws against that sort of thing: e.g. https://en.wikipedia.org/wiki/Debt_monetization#Legal_prohibitions_against_monetary_financing  
> **username_1**: @username_2 that law is about **direct purchasing of gov bonds** fed can still purchase that bond on secondary market and then tear the bond so it never needs to be collected.  
> **username_2**: I have not read the fine print of the banking act of 1935, but it would pure madness if the Fed could circumvent it so easily. I don't believe for a second they could do it.  
> **username_1**: @username_2 1. Just google balance sheet of fed and you will see they hold US treasuries. It is also common knowledge they do hold the debt and you can read about that in literally any 101 textbook so I am surprised you are surprised by it. 2. This is not circumventing the act. Government has to still sell first bonds to primary buyers who then sell it to central banks - this is to create imaginary wall between treasury and central bank so they do not work directly together which helps to protect central bank independence  
> **username_2**: I know the Fed hold government bonds - there is no surprise. But I still don't believe that the Fed would or could decide not to collect coupon or principal payments on a government bond. Has there been a single example since 1935?  
> **username_1**: @username_2 1. It is 100% possible here you have some article discussing it, and there are many economists such as Picketty advocating that is what central banks should do it https://www.google.nl/amp/s/www.bloombergquint.com/amp/opinion/central-banks-cancelling-government-debt-is-no-panacea. The article is for ECB but there are Fed proposals floating around as well 2. I am not aware of Fed doing that in the past since obviously Fed does not want to take irreversible actions but Fed never did QE before 2009 also and now it does it regularly.  
> **username_2**: Yes, some people would like the Fed to do it, and maybe it's a good idea - but it would require changing the law (or simply breaking it!).  
> **username_1**: @username_2 please give me link to a law that says Fed is prohibited from **writing off some of its assets**. There isn’t such law. The law you linked previously was about Fed being able to directly purchase government bonds. If you will give me link to such law I will concede  
> **username_2**: It would take too much time to find. Besides, generally when you see a law banning doing X directly, you would normally expect X to also be banned even if doing it indirectly.  
> **username_1**: @username_2 1. “it would take too much time to find” <- it would take infinite time because it does not exist. 2. But that is fallacious argument. Literally you yourself just showed that doesn’t hold by showing that law that prohibits Fed buying government debt directly yet as you already above admitted and as it is widely known Fed is allowed to buy government debt indirectly on secondary markets. If anything the general rule of western jurisprudence with perhaps few exceptions is that what is not explicitly prohibited by law is allowed  
> **username_2**: But the "X" is different between the tow cases... and that is the whole point of the law. It's to guarantee that the government pay interest on their bonds. Why would anyone make a law which is all about ensuring that the government pays interest on its bonds whilst simultaneously allowing a simple mechanism for the government to pay no interest and no principal?  
> **username_1**: @username_2 1. What law you are talking about? 2. There are laws that force debtors to pay an interest and debt, but there are also laws allowing debt forgiveness and even defaults. If I lend you 100€ at 10% I can always as a creditor decide I forgive you the debt and you don’t need to pay anything or just forgive you part of it. You seriously never heard about debt forgiveness? 3. Both government and companies can default on their debt. Defaults can be selective government can default on foreign debt but not domestic or vice versa, it can default on any debt. Again you never heard about defaults?  
> **username_2**: I don't have time to continue this. I'll just reiterate that there are laws in place designed to ensure that the government pays interest on its bonds and I will leave it to any reader to deduce everything else that might follow from that.  
> **username_1**: @username_2 I will reiterate basic well known facts that both debt forgiveness and defaults are allowed under US law and that there is no legislation that says Fed cannot write off some of the debts it holds and let any reader deduce everything else from that  

---

### Answer by username_3 on 2021-09-26. Score: -1

Imagine there is no Federal Reserve. It's easy if you try (because the Fed did not exist prior to about 1914). When the federal government operates in a world without the Fed the Treasury department would collect taxes, fees, and other receipts into commercial bank accounts due to the federal govt called Treasury Tax and Loan Accounts (TTL). The net sale of new Treasury bonds would sweep funds from bank deposit accounts into TTL and the net repayment of bonds would sweep funds from TTL back into bank deposits. If the government uses debt management to offset a deficit or surplus then it would sell bonds to cover the difference between spending and collections into TTL. The spending would increase bank deposits at the same rate that bond sales and collections drain bank accounts so the federal government would not increase or decrease deposits in the aggregate bank when it uses debt management to cover the deficit or dispose of the surplus. To dispose of the surplus the Treasury would just net redeem outstanding Treasuries rather than run up bank balances in its TTL accounts. The float of liquid Treasuries is then generated as an alternative financial asset to deposits which are highly liquid and short term Treasuries are highly marketable securities that keep par with bank deposits.

Suppose the federal government runs a persistent surplus. Then it would retire all outstanding Treasury bonds and be forced to increase its spending to offset collections or increase its bank account balance at the expense of those who transfer their account balance to the federal government on the books of the aggregate bank sector. This is like the King in Robin Hood who taxes the people to store up gold for the Crown. It would be bad public policy for the governments at any level to use tax policy to accumulate a large and growing bank account because that drains the financial savings of other sectors.

When the Fed exists it can buy or sell Treasuries and issue bank reserves also known as federal funds. The Fed should be considered to be the Monetary Authority of the Federal Government. The banks, Treasury, and so-called government-sponsored enterprises clear payments among each other using the liabilities of the Fed known as federal funds. The Treasury then has another account at Fed called the Treasury General Account (TGA) which it can use to spend, or to collect funds on the level of reserves, or transfer funds to TGA from TTL, etc. When the Treasury applies debt management this does not alter reserves or deposits in the aggregate bank sector to a first case approximation. The purpose of debt management by Treasury is to enable Fed to have control over monetary policy, using its balance sheet, without Fed having to increase the volume of its operations to offset the impact of Treasury if it did not use debt management to assist Fed.


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