Bounty: Explain what the FED is doing

in fed •  25 days ago 

PrintingMoney-58b83d575f9b5880809b9a14.jpg

Everyone is talking about the FED printing money and protecting the short term rate.

I.e.: https://www.forbes.com/sites/vineerbhansali/2019/09/19/fixing-major-plumbing-problems-with-a-plunger-why-the-repo-problem-is-deeper-than-it-appears/

Or : https://www.ccn.com/dollar-printed-75-billion-why-bitcoin-matters/

Explain to our friends on steem what is going on here to collect the bounty

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Here's my understanding of it:

Many organizations need short-term funding to continue their operations. Sometimes they have money that is going to be coming in, but they need funding to make it until they collect. To get the funding, they use the overnight market.

The overnight market works by party A asking for funding from party B. Rather than getting a loan, party A actually sells something to party B with the promise to repurchase the item at a set date. One item that is most often used is US Treasury bonds. The issue lies in the fact that fewer and fewer banks (and countries) want treasuries. Because treasuries aren't desirable as collateral, the rate for using them skyrockets (2.5% went up to 10%).

If businesses can't get the funding they need, they could default on their obligations. This can rapidly snowball, especially if any of the organizations owe money to each other (this is one of the risks of the banking system since they all owe each other so much money).

The Fed is printing new currency to purchase the treasury bills that people are trying to use as collateral for their loans. This is problematic because it provides too much liquidity which lowers the interest that must be paid. There's no true price discovery when that happens. Also, the currency is further debased and the purchasing power reduced because more currency has been created.

Does that help?

I did not know that this had happened with the dollar, I only know that when a government prints money without support momentarily solves the problem but the economy eventually weakens because there is a lot of paper in the street without backing, that was one of the things that happened in my country.
Cryptocurrencies are the best investment, here nobody can print paper and weaken, it is a transparent business.

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