I can never get my brain around the idea of money balances as causal. If M1 has grown but GDP and prices have not, then velocity must be taking a big hit. Instead of business revenues funding business spending, government printing funds it, and the money that would have circulated moves to the financial markets instead, reducing the cost of capital. (I hate the term “asset inflation” in relation to a transaction in which it isn’t clear who’s buying and who’s selling.)

In ordinary times, money balances arise because someone wants to spend some money. Consequently, M1 or M2 is an indicator of things to come. But if the government replaces T-Bills to M1 money that bears interest at the same rate, the resulting change in M1 seems to me a non-event. (Note that the remuneration rate on excess reserves matches the T-Bill rate only because the Fed has bought the T-Bills. Absent Fed demand, the T-Bill rate would be higher. Isn’t that why the Fed buys the bills?)

The law does not require the Fed to pay competitive interest on excess reserves. The “remuneration” rate compensates the banks for administering the reserves, not for taking a credit risk. Consequently, the Fed can buy Treasury paper on the open market to prevent rates from rising and pay whatever it sees fit on the resulting reserves. Doesn’t that protect the Treasury from having to rely on inflation to repay the debt? Can’t the Fed monetize debt and impose higher reserve limits increase the discount rate? If the spread between Treasuries and corporates rises, then money will flow into corporates and bonds will be sold to the Fed, which will pay bupkes on the reserves thereby created.

What am I missing?