To understand how printed money flows into the economy, let's look at the process using the example of the United States, using Treasury and mortgage papers.
What is printed money?
When we talk about "printed money", we mean the money that the central bank creates - in this case, the Federal Reserve System (FRS). This happens when the Fed increases the money supply to stimulate the economy, for example, through the purchase of securities.
How does money get into the economy?
The process of pouring money into the economy can be described as follows:
Securities purchases: The Fed buys Treasury bonds and mortgage-backed securities on the open market. When the Fed buys these securities, it essentially gives money to sellers (for example, banks or investment funds). This transaction increases the money in circulation.
Increased liquidity: After receiving the money, sellers can use it for lending, investing or other financial transactions. For example, banks can use these funds to lend to businesses and the public.
The role of Treasury and mortgage securities
Treasury bonds: These are debt obligations that the U.S. government issues to finance its expenses. When the Fed buys these bonds, it introduces new money into the economy, which can be used for a variety of purposes, from buying goods to lending to businesses.
Mortgage securities: These securities are backed by mortgage loans. When the Fed purchases mortgage-backed securities, it also contributes money to the economy, making housing construction more affordable and improving conditions for borrowers.
What happens if the Fed does not reinvest
Now back to your original question about what happens when the Fed decides do not reinvest funds received from the expiration of Treasury and mortgage securities.
Liquidity reduction: If the Fed does not buy new bonds with the funds it receives from the expirations, it means that this money is not being returned back to the economy. For example, if $60 billion from Treasury bonds and $35 billion from mortgage-backed securities are not reinvested, then this amount will not be available for new loans, purchases and investments.
The complication of financial conditions: In the end, this may lead to the fact that there will be less available money in the economy. For businesses, this means that loans may become more expensive or more difficult to access, and for consumers, that mortgages may also become less affordable. This may slow down economic growth.
In the post-Soviet space, the procedure is similar, only all manipulations are carried out between the Central Bank and the Ministry of Finance (Government – executive branch).
Thus, printed money is poured into the economy through purchases of securities by the central bank. But if this money is not reinvested, it may not only not contribute to growth, but on the contrary, lead to a reduction in liquidity, which may negatively affect economic conditions.
