It has to flow in somewhere, it cannot just disappear from the balance sheet. Money can be created to grow an economy, i.e. it has to be backed up by people's production. Can the fed even destroy money to fix inflation? I am not an economist, but I doubt it.
Smart/rich people are always betting on potential gains on the market - i.e. they are always searching for the next best investment, they key is to find out where that money is going to be parked next.
There is no conservation rule saying that financial assets can never disappear. They don't have to go anywhere.
Financial assets can disappear from a balance sheet when it becomes clear they will never be paid. That's what happens when a debt is written off. Similarly when stock drops and is marked to market.
These assets are essentially predictions of future income. Sometimes that income never materializes. The promise was broken or the prediction was over-optimistic. People discover they're not as rich as they thought.
For a cryptocurrency, the only expected future income is from other people buying when you sell. If other people aren't there to buy at the price you expected, your prediction is just wrong.
Making money appear and disappear from circulation is one of the Fed's primary functions.
> The Fed can influence the money supply by modifying reserve requirements, which generally refers to the amount of funds banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able to loan more money, which increases the overall supply of money in the economy. Conversely, by raising the banks' reserve requirements, the Fed is able to decrease the size of the money supply.
They lowered reserve requirements to zero at the start of the pandemic. I think most creation is done through open market operations since the housing bubble anyway.
That is the story they like to tell you but the fed has almost no control over money anymore. The best they can do is control treasury yields and do some damage control.
Demurrage currency is designed to have a stable money velocity. Regular currency can simply stop circulating. I. e the fed has no control over money that is being stock piled.
It doesn't really make sense to think of it like that. "Money" is simply the value of what's in everybody's accounts, plus cash but that's a tiny percentage. When a bank makes a loan, new money is created. When a loan is paid off, money is destroyed. The role of the central bank is to keep enough money flowing in the system to create economic activity. Too much money and you get speculative bubbles. Too little money and the economy grinds to a halt.
Yes. That's how they control the money supply via Open Market Operations. They either print money from thin air to buy US Treasuries, or they sell US Treasuries and pocket the money received. The money they pocket basically ceases to exist as far as the productive economy is concerned.
Glad to help with sources - it took me a long time and many different web searches to understand this. And it still seems like kind of a Rube Goldberg machine, but at the end of the day, this is how it works.
Have a look at the following:
> Open market operations (OMO) refers to the Federal Reserve (the Fed) practice of buying and selling U.S. Treasury securities, along with other securities, on the open market in order to regulate the supply of money that is on reserve in U.S. banks. The Fed purchases Treasury securities to increase the supply of money and sells them to reduce the supply of money. The objective of OMOs is to manipulate the short-term interest rate and the supply of base money in an economy. By conducting open market operations, the Federal Reserve can achieve the desired target federal funds rate by providing or removing liquidity to commercial banks by buying or selling government bonds from or to them.
> The Fed buys U.S. Treasuries and other securities from its member banks and replaces them with credit. All central banks have this unique ability to create credit out of thin air. That’s just like printing money.
> ...
> The Fed can also reverse the effects of quantitative easing (QE). It does this by selling Treasuries and mortgage-backed securities to its banks. The Fed removes dollars from the banks' balance sheets and replaces them with these securities. What happens to the dollars? They vanish. In other words, they go back into thin air, where the Fed got them in the first place.
Another insight you can get from these articles: the Fed buys US Treasuries from the US government, also with money from thin air. So it's not really possible for the government to go bankrupt or for treasury interest rates to skyrocket, because (1) the government can always raise more money by issuing treasury bonds, (2) the Fed serves as the treasury buyer of last resort, and (3) the Fed will buy the bonds at whatever interest rate it likes. Since it's the Fed's job to keep the economy stable for the US government, it will always do this if the government needs it to.
As evidence that this structure can work, check out Japan, where national debt is currently over 250% of GDP... but interest rates are extremely low. Because Japan's central bank serves as the treasury buyer of last resort, and keeps interest rates low in service to the government.
The fed does indeed sometime draw in money and park it (to be used the next time they need to increase the money supply, in a sense)
It's also the case that money velocity can always slow to a crawl. If it reaches a point where people figure they are more likely to keep value by just holding the money instead of investing it into something due to falling asset values, that can overcome even the desire to beat inflation. It's all very situational, but sometimes money doesn't get invested, or at least the rate at which it changes hands slows down due to a lack of good investments in the system.
We're talking about marginal changes here. I think plenty of people are still happy to have their money in these speculative assets.
Those taking the money out may have liquidity needs elsewhere due to expected Fed actions, or may have lost confidence that the asset will appreciate at the rate needed to justify the investment at higher interest rates.
Just my speculation. It's interesting to think about!
> plenty of people are still happy to have their money in these speculative assets
Are you sure? All the stocks that got bumped during covid are now down/or on their way to pre-pandemic levels. Even FAANGs that were supposed to fuel the stay at home trend: Amazon, Netflix (-20%). Crypto might be next...
Somebody is making a killing, where will that gain go next?
I sort of get what you mean, but I'm not sure if it makes sense. If I have some FB stock and sell it to you for $303.17 (price as of this moment), I gain $303.17 and you lose $303.17, and a stock changes hands. Is there more money from this transaction that needs to be parked somewhere?
There's only "more money" if you look at one side, and only one side, as "the savvy speculator" who is always looking for a new place to park the money.
The people who move stock prices significantly are usually the ones doing it by volume - i.e. institutional investors (ex: Cathy Wood). Retail investors are a recent phenomenon when in aggregate.
The question still remains, where are they going to park these profits?
https://en.wikipedia.org/wiki/Money_burning
Smart/rich people are always betting on potential gains on the market - i.e. they are always searching for the next best investment, they key is to find out where that money is going to be parked next.