Could you explain why this is obviously correct? It's not obvious to me. To me, the Fed's current process of bidding on very liquid, publicly sold assets seems to be the most neutral way of injecting dollars into the world.
Rather than injecting new money into the financial and government sectors and hoping for a trickle down effect, it seems much more fair to just cut checks to all citizens.
Suppose I'm rich. The Fed creates a dollar. The Fed offers me a dollar for my treasury bill worth $1. I accept. As a result, I am now a dollar richer but a $1 treasury bill poorer. Have I gained? I have $1 more in money, but $1 less in assets. So I'd say no, I haven't gained. The only way I gain is if the Fed pays me more than the treasury bill is worth. And since the Fed pays market price, this is difficult to do.
I.e. if the bid/ask is $100/$100.5, the fed will have to buy at $100.5, even if the next market trade might have happened at $100.25. So the rich owners of treasuries do reap a small reward, something on the order of the size of the spread.
That said, your point is generally correct. Buying treasuries results in $100 of money injected into the economy, while redistributing only $0.25 of wealth.
Meanwhile raising the market price of bonds makes debt servicing less expensive, saving taxpayers' money. Unless the market expects inflation, lowering bond prices again.
That's not to say there aren't massive gains to society from a policy mechanism that both provides a relatively efficient and reversible means to manage inflation and helps stabilise the banking system, but the fact is it favours the wealthy much more than the alternatives.
The Fed is a large enough new buyer that it will move the market price.
The newly created money is worth more when it's new. When the average person finally receives the money, the value is worth less through inflation.
Secondly, the rich can borrow money from the fed at 0%. Then they can buy bonds from the government and receive interest on that. How does the average person do that?
Every right-wing commenter in the world would immediately see that this is wealth redistributing socialism and needs to be stopped instantly.
It's the same if you decide to pay rich people for their bonds. Only, you know, it helps rich people instead. You bought a million dollars of bonds last year, this year you can sell them for $1.1 million. The profit goes straight into the pockets of... people who can afford to buy a million dollars of bonds.
I guess you are vastly more likely to own a treasury bill if you are rich.
If you are poor Fed buying treasury bills does nothing for you.
I think it's fine for $100 million to go wealthy people if the wealthy people lose $100 million of treasuries at the same time. It only becomes a problem if the Fed overpays for the assets. Which is why it's so important to pick giant liquid asset markets like US treasuries. Giant liquid markets are the least likely to be distorted by Fed action.
They have $100 million more in money, but $100 million less in assets. Their net worth is unchanged. They are not richer, even when considered as a class.
(I think your comments could be improved if you made some of your thinking more explicit. I have difficulty following your lines of reasoning. Brevity has value, but also cost.)
(1) I announce that my general policy will be to buy treasuries when I want to spur inflation
(2) I announce that next week I am going to buy $100 million of treasuries.
(3) I actually buy the treasuries.
A very interesting question is: At which point (1, 2, or 3) was demand increased?
(I would argue that if Fed purchases are expected, they do not change the price and treasury owners do not benefit.)
Also, things like land and real estate tend to be bought at steep discounts and then sold for huge profits.
Finally, having a $3m house is not the same as having $3m in cash.
Which is precisely what happened. Many of the toxic assets that are now on the fed balance sheet would have been close to worthless (if not completely worthless)
So far your worry has not borne out. The Fed has been earning about $80 billion per year, and its MBS portfolio is worth about $1 trillion.
http://www.economist.com/news/finance-and-economics/21570753...
The answer was: they don't. They're bidding at auction, so to that extent, the value is market-based (banks with assets they think are valued over what the Fed is paying will withhold those assets), but to the extent that it's pretty much the Fed creating this market of and by itself, there's not much competition.
The interest of the Fed isn't in buying valuable assets. It's in injecting liquidity, that is, cash, dollars, into the financial system.
I've kicked myself for not having asked another question (how is the banking system supposed to work and lend when real returns on financial capital are negative), but the one I did ask and the answer I got were informative and illuminating to me.
The question I didn't ask, it turns out, has been asked by others (though I need to track down specific instances). The declining real returns of investment is something that's been specifically noted, see Deloitte's Shift Index:
http://www.forbes.com/sites/stevedenning/2012/01/25/shift-in...
http://www.reddit.com/r/dredmorbius/comments/1y3z3n/the_shif...
The only way for the $100 million not to enter the money supply is for the wealthy to hold $100 million more in cash. If they invest it in bonds and stocks, then now the previous holders of those bonds and stocks hold the cash.
The point of distributing the money is so that money is worth less and prices become effectively lower, causing people to buy more stuff and businesses to make more stuff (i.e., monetary stimulus of aggregate demand).
Here is a blog post on the hot potato effect: http://www.themoneyillusion.com/?p=23314
edit: replied without reading the HPE post. My point, I guess, is that this helicopter drop of cash, if evenly distributed (e.g., every US citizen received 3.19488818e-9 of it), would disproportionally be distributed to those who would spend it immediately, increasing aggregate demand - compared to those few percent who would just add it to their investment portfolio.
* Foreign - $5.724 trillion (national breakdown: http://www.treasury.gov/resource-center/data-chart-center/ti... or http://www.gao.gov/special.pubs/longterm/images/countries_la...)
* Social Security (Social Security Trust Fund and Federal Disability Insurance Trust Fund) - $2.764 trillion
* Federal Reserve - $1.794 trillion
* Other (individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors) - $1.497 trillion.
* Mutual Funds - $946.4 billion
* Office of Personnel Management (Federal Employees Retirement, Life Insurance, Hospital Insurance Trust Funds, Postal Service Retiree Contributions) - $826.8 billion
* State and Local Government, including their pension funds - $703.5 billion
* Private Pension Funds - $457.7 billion
* Military Retirement Fund - $419.5 billion
* Banks - $341.4 billion
* Insurance Companies - $263.3 billion
* Dept. of Health and Human Services (Federal Hospital Insurance Trust Fund, Federal Supplementary Medical Insurance Trust Fund) - $260 billion
* Other Federal Programs and Funds - $260 billion
* Uniformed Services Retiree Health Care Fund - $189 billion
* U.S. Savings Bonds - $181.7 billion
* Department of Energy - $54.8 billion.
* Federal Deposit Insurance Corporation - $33 billion
* Department of Labor (Unemployment Trust Fund) - $30 billion
* Department of the Treasury (Exchange Stabilization Fund) - $26 billion
One thing I'd like to point out from your list above is that Social Security is the largest owner of treasury bonds. If the Fed buys treasury bonds from Social Security, that is essentially distributing money to lots of people directly - exactly the suggestion of this thread's article! :)
(Though it's not really the same, since they buy treasury bonds in an open market, not directly from Social Security. The amount of bond-buying has nothing to do with the amount of Social Security checks going out, which is a good thing, in my opinion.)
Note that this is quite distinct from my supporting "buying treasuries disproportionately benefits the wealthy" - I am not convinced enough to hold a real opinion on that either way. Reading back further, I see the original claim was in fact "Only the wealthiest Americans (and foreigners for that matter) own the assets the Fed is bidding on", which claim the data certainly contradicts.
!A = 52% of the debt
q = not owned by the wealthy or foreigners
!q = owned by wealthy or foreigners
I believe the data shows A && q, but !A && !q is much less clear and A && q is larger than many people might expect, that's all. A && q does not mean !(!A && !q) as you point out.
Around half of !q is owned by foreigners, mostly foreign central banks, so there's that. The distribution of the remainder of !q is unclear.
Also, note the difference between "benefits" vs. "own" which are not the same. Buying bonds has a variety of effects. Buying a bond from someone benefits the former owner immediately but raising the price of bonds lowers bond yields making buying all new bonds less profitable. It also lowers the cost of financing all government debt, benefiting all taxpayers. But reducing bond yields tends to increase the demand for other assets, such as stocks, increasing the paper value of stocks. Similar story for pushing dollars abroad to foreign bond holders, sending dollars abroad makes the dollar cheaper, boosting exports and hurting imports but reducing market bond yields should do the opposite. But if the market expects inflation from quantitative easing it should reduce the future value of money, increasing bond yields again, but tends to depress stocks but not value stocks as much...
Simply put, the claim that buying bonds helps the wealthy is an idea that needs a lot more support than thoughtless one-liners that twang the emotional strings of power and betrayal.
!A = 52% of the debt
q = not owned by the wealthy or foreigners
!q = owned by wealthy or foreigners"
None of those is really logical negation (it's set complement), hence my confusion.
"I believe the data shows A && q, but !A && !q is much less clear."
I agree. I don't believe the data shows the claim you label "!A && !q" - I do believe it admits it.
Your later point - that effects outside bonds probably dominate effects confined to bond prices - I think is correct.
"Simply put, the claim that buying bonds helps the wealthy is an idea that needs a lot more support than thoughtless one-liners that twang the emotional strings of power and betrayal."
Certainly the case.