Money supply mystery

So how does the money supply keep expanding if the Fed is supposed to be tightening?  One possible answer has been unearthed by the New York Post's John Crudele in a column that Justice Litle from Outstanding Investments wants to bring to our attention.  Writes Crudele:

For the past few years the U.S. Treasury has been quietly involved in what the financial markets call "repo" agreements and this near-secret operation could explain why the nation's money supply seems to be confoundingly large…

Most people judge whether the Federal Reserve is trying to influence economic growth by its actions with interest rates. If the Fed is raising rates, for instance, it really isn't tightening credit if it is also putting large amounts of money into the hands of bankers through repos.

The opposite is also true: the Fed can't really speed up the economy by cutting the interest rates it controls (and hoping all other rates come down) if it is keeping a tight fist on the amount of money banks have available to lend. This is the way the repo market has worked – up to now.

These days, whenever the Treasury finds itself with extra cash lying around, it can turn the money over to the Fed to be invested.

Read the whole thing.  Justice's comment:  "Meanwhile, Bernanke is adjusting to his new role as sock puppet…"

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