[howeyc]

Scenario 2 is your number 1, just one step further in the past. Dumping treasuries leads to you having dollars, you've basically switched from interest-bearing (admittedly super low interest rate right now) to non-interest bearing (cash). You still need to put the money somewhere, hence asset bubble.

Also, why does the government debt "bubble" ever have to "pop"? Does everyone still believe the government has to "pay off the debt"?

They don't. Ever. For a large number of reasons, to name just a couple:

- No more treasuries or bonds (how many people would freak out if those no longer exist)

- They can print more money forever. Besides, at this point it's just numbers in the FED computer system. Hardly any of it even exists as a physical object (paper, coins).

Also, I'll let you in on little secret. The Fed is never going to fully unwind its balance sheet.

[tryptophan]

>Dumping treasuries leads to you having dollars, you've basically switched from interest-bearing (admittedly super low interest rate right now) to non-interest bearing (cash). You still need to put the money somewhere, hence asset bubble.

The balance sheet can be unwound simply by waiting for the bonds to expire, then the money goes poof out of existence the same way it poofed into existence.

What the fed has been doing though, is rolling the money into new bonds, keeping the total balance ~constant. If they didn't, it would leave a $4T hole in the bond market that would suddenly need to be filled.

[rsp1984]

The balance sheet can be unwound simply by waiting for the bonds to expire, then the money goes poof out of existence the same way it poofed into existence.

How would that work? The money's been created and has been put into the economy. Balances on bank accounts have increased. You can't just take it back just like that.

[jkhdigital]

When the bond matures it must be paid back, and the money that was created when the Fed purchased it is now destroyed as the Fed receives the bond principal.

If the bond is not paid back and the debtor defaults, well... this can't happen with US Treasuries because the fed is an arm of the government and will always roll over a bond. But if it happens with the corporate bonds that the Fed is buying, then the US Treasury is on the hook for the losses because by law the Fed cannot be impaired.

[tryptophan]

Because the bond belongs to the fed.

When it matures, the fed holds everything. There isn't anything to "take back"; they have it all already.

[rsp1984]

When the bond matures it's either paid back or rolled over to a new bond or the debtor defaults. There is no fourth option.

[xiaolingxiao]

Asking as a relative novice, if the Fed does not "unwind its balance sheet," does this mean overtime the Fed will come to own more and more "things"?

[icu]

Yes, just like the Bank of Japan.