💍Essential for beginners, a clear explanation of #缩表 QT and #扩表 QE💍 (Part 2)
--Recently, I have been quite exhausted with the popular science surrounding QT and QE, and I've racked my brains to write this popular science article, preparing to hand it to anyone who doesn't understand; it really can't be more detailed or simpler.
Continuing from the previous article's QE section
👉Scenario 2: Quantitative Tightening (QT) - 'Collect money at maturity, destroy the money'
Objective: To combat inflation by retracting excess liquidity from the market.
Operation: The Federal Reserve passively allows the treasury bonds it holds to mature without reinvesting.
1. Initial State (Before QT starts, following QE)
Federal Reserve: Assets (1 piece of $100 treasury bond), Liabilities ($100 reserves).
U.S. Treasury: owes the Federal Reserve $100 in debt.
2. The treasury bond has matured
This $100 treasury bond has reached its repayment date.
The Treasury needs to return $100 principal to the Federal Reserve. Where does the money come from? The Treasury raises funds through taxation or by issuing new treasury bonds to other investors.
The Treasury transfers $100 in cash to the Federal Reserve's account.
3. Key Step: 'No Reinvestment' under QT
Under QT policy, after the Federal Reserve receives this $100 cash:
It will not use it to purchase new treasury bonds.
Instead, it lets this $100 cash remain 'static' in its own accounts. In accounting terms, this cash has no corresponding liability item to match, thus it is essentially 'canceled' or 'destroyed'.
4. The State After QT Completion
Changes in the Federal Reserve's ledger:
Assets decrease: The $100 treasury bond disappears (converted to $100 cash, but the cash is frozen/destroyed and does not count as effective asset expansion).
Liabilities decrease: The corresponding $100 'bank reserves' are also simultaneously canceled.
Balance sheet size shrinks: from 200 (assets + liabilities) down to 0 (assuming this is the only asset). In reality, it's a slow contraction of tens of trillions of dollars.
Market Effect:
The reserves in the banking system have permanently decreased by $100.
The base currency in the market has been withdrawn, tightening liquidity.
✅ The Core Essence of QT:
Federal Reserve: 'Destroys money' by shrinking its own balance sheet.
Market: Liquidity is permanently withdrawn. This is a slow but ongoing 'draining' process.