In order to achieve quantative tightening the US Government is letting debt expire and not renewing it.
What does this actually mean in practice?
Presumably once money is made it is essentially impossible to remove it completely from supply?
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$\begingroup$ I think you're starting here from the wrong assumption that QE increased the M2 multiplier much. It didn't. If you want an answer to your question, you need to define "money" in your last sub-question. $\endgroup$– fantastic peace and prosperityCommented May 9, 2019 at 8:23
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$\begingroup$ OK thank you for the clarification. But can you help me understand the procedure for how the fiat is created and destroyed by easing and tightening? $\endgroup$– 52d6c6afCommented May 9, 2019 at 8:26
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$\begingroup$ The phrasing in this question is incorrect. The “US government” would refer to the consolidated Treasury/Fed, while the Fed alone is behind “quantitative tightening”. The correct phrasing would be “the Fed is not buying Treasury securities to replace ones that mature.” $\endgroup$– Brian RomanchukCommented May 11, 2019 at 11:51
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1$\begingroup$ Since “quantitative tightening” is just a reversal of easing, this might help. economics.stackexchange.com/questions/5211/… $\endgroup$– Brian RomanchukCommented May 11, 2019 at 12:04
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1 Answer
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When a U.S. Treasury bond matures the principle is repaid in money. If the owner of the bond is the Federal Reserve, it can reinvest the money in an asset like a U.S. Treasury bond. If the Federal Reserve wants to reduce the money supply the receipt of the money is coincident with a reduction in the account of the federal government. Since it is computerized they do not have to destroy any currency and coins; they change a number in a computer.
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$\begingroup$ Unfortunately I still don’t understand. To ease does the Treasury issue a bond which is then bought with invented money by a central bank? To tighten does the Treasury pay real money to the central bank who then deduct that money from their account? $\endgroup$– 52d6c6afCommented May 9, 2019 at 6:22
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1$\begingroup$ To stimulate demand in the economy the central bank can buy a Treasury bond. There is a market in bonds all of the time so a new issuance is not necessary. To pay for it, the central bank will increase the account of the dealer that it purchased the bond from. This is just a change to a number in a computer. To reduce stimulus in the economy the reverse can happen. The central bank sells a bond to a dealer and reduces the account of that dealer (bank). In neither of these operations is a bond necessarily maturing. These operations affect interest rates. $\endgroup$– H2ONaClCommented May 9, 2019 at 8:49