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Why Tax Cuts & the Federal Reserve Reducing Its Balance Sheet, Is Risky

Why Tax Cuts & the Federal Reserve Reducing Its Balance Sheet, Is Risky

One big flaw in the discussion about the congressional tax bill is the lack of understanding of the additional revenue from the sale of new government bonds that will be required to fund the government. Such bond sales would result not only from the loss of revenue from the tax cut but also the necessity to sell more bonds to bankroll the government as the Fed reduces its balance sheet.

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The Big Risk Awaiting the New Federal Reserve Chair

The Big Risk Awaiting the New Federal Reserve Chair

But the biggest risk is not a spike in interest rates. It is: when the public buys the bonds the Fed sells, money is removed from the economy. In a normal transaction, a bond’s seller would deposit that sale’s proceeds into the seller’s commercial bank. That deposit would remain in the economy and could be used for additional spending. But when the Fed sells a bond, it doesn’t deposit the money; it extinguishes it.

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