Unwinding

In the recession of 2008, largely precipitated by the home mortgage fiasco, the government printed money by a process called quantitative easing. The fed clicked a computer key and created 4 trillion dollars which they used to purchase government bonds in order to keep interest rates low. Now that the recession is over the fed must do something to reverse this and that something is called, “unwinding”. They can sell the bonds or wait until they mature and cash them in but in either case the fed ends up with 4 trillion in cash and then what? The fed by law is supposed to turn over cash to the treasury but is this really cash or just a click on the computer? To do either one of those things is called, “monetizing the debt”. This increases the money supply and keeps interest rates low but the treasury is required at some point to pay back the fed. The best move at this point is to unwind at such a slow rate as not to disrupt markets. Some question why the treasury can’t apply the 4 trillion to the current 20 trillion debt but that would lower the value of the US bonds currently held by foreign investors like China and if the US monetizes like that other countries see US debt as a bad investment. The way out as long as the economy continues to grow will be a slow unwinding.