sorry ffe,
I have renamed the thread after mis-using terms. I am specifically talking about the monetary base and in what way open market operations via repos / reverse repos are used to create money. The only way I can see new currency entering the system is if the central bank purchases an asset then sells it back at a loss.
For money to enter the economy, the reserve bank must be a net loser in a transaction.
You're right. The Fed will buy assets and pay with money that they just make up to raise the monetary base. Not much of this newly made up money has to be newly minted cash. It's just numbers in a computer and, as new money, it goes through the multiplier effect due to the fractional reserve system.
The most common asset the Fed buys is US government debt. The Fed is supposed to only raise the base money supply as the economy needs it to grow. So it only buys what it needs in US gov debt.
If the US government issues more debt than the Fed wants to buy (which happens most of the time) then they have to find private buyers for the federal debt. This route does not increase the base and makes it harder for other borrowers in the economy since this drives up interest rates.
If the Fed decides it must increase the monetary base by more than can be accommodated by buying government debt, they'll buy other assets. This can include business bonds or even assets banks want to get rid of like questionable mortgages.
To reduce the monetary base the Fed sells assets. This can happen if inflation ticks up and the Fed decides to slow things down. They accumulate numbers in accounts they own as a result and just drop zeros as needed. Money disappears.
As the government pays off its debt (to the Fed among others) the monetary base does want to shrink. The Fed just makes sure it continues buying enough debt (government or other) to not let that happen and in fact to force the monetary base to grow at some rate they choose.
The Fed may or may not loose as a result of this but they don't care since it's made up money.
