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can you please clarify this for me?
Gov't need money for deficit elimination, so they issuing bonds (lets say 1T, 10 years, 2%).
Fed is buying the bonds with fresh money, so the gov't now has new 1T$ to spend.

But - I always hearing the 1T is getting to the banks, and the amount of market money is 1T x Money Multiplier.

How does the money gets from the govt to the banks?

Thanks.

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  • $\begingroup$ Commercial banks do not "get money" from the government. They do so either from the FED or either from worldwide financial markets. And actually, banks can even buy gov's bonds, which in this case is the contrary of what you describe. $\endgroup$ – keepAlive Oct 4 '18 at 10:37
  • $\begingroup$ So how the printed new money gets to the markets as loans? as we know printed money lowers the interest rate as the banks issuing more loans for individuals. you said they can get the money from Fed - in what way ? Thanks $\endgroup$ – gabi Oct 4 '18 at 10:40
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    $\begingroup$ Conceptually, the FED simply buys bonds emitted by commercial banks. But using the word "buy" here is misleading. The FED is not a traditional economic agent. $\endgroup$ – keepAlive Oct 4 '18 at 10:42
  • $\begingroup$ I will try to rephrase - on depression, when there is deflation, the Fed lowering the rate by buying more and more bonds and releasing money to the market. but if the banks has not enough bonds (or dont want to) to sell, the govt issuing new bonds. Fed will buy the new bonds, but I cannot see how it will help to stop the deflation, as the money will sit on the govt table, it should be released to the market.. $\endgroup$ – gabi Oct 4 '18 at 10:46
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Commercial banks do not "get money" from the government. They do so either from the FED or either from worldwide financial markets. And actually, banks can even buy gov's bonds, which in this case is the contrary of what you describe.

Conceptually, the FED simply buys bonds emitted by commercial banks. But using the word "buy" here is misleading. The FED is not a traditional economic agent.


First, note that the FED has two main possibilities to lower interest rates. They can do it directly by saying, "ok guys, tomorrow refinancing will be less expansive" or indirectly by injecting liquidity in the system, i.e. by proactively buying commercial banks' bonds for (almost or really) nothing, or even paying them interests for that -- which is equivalent to having negative interest rates!

When the FED does so (either directly or indirectly), commercial banks will be able to refinance themselves at a lower cost. Which means that at the end, these commercial banks will also be more, say, flexible, and thus will stimulate demands (here and there) in the national economy by lending money (here and there). If supplies stay constant, markets will reach a new equilibrium via prices rising due to these stimulated demands $\iff$ stops deflation.

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  • $\begingroup$ Thanks! direct = lowering the rate for banks overnight loans? indirect = buying bonds to increase its value and lowering rate? $\endgroup$ – gabi Oct 4 '18 at 10:57
  • $\begingroup$ @gabi. Exactly. Actually, sometime the Fed even buys bonds for nothing, saying "okay I am not waiting for any interest payments." The relation you involve between prices and rates is more true in the cases of traditional interactions between rational agents. Also, the inverse relationship there is between prices and rates comes from the pricing method used around the world, slike the DDM or how NPVs are calculated. Higher rates means lower prices indeed. And the world use this method! $\endgroup$ – keepAlive Oct 4 '18 at 11:02
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    $\begingroup$ Thanks you, I have another Q related to this, will open new thread :) $\endgroup$ – gabi Oct 4 '18 at 11:07

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