How does the Fed cancel out its debt so as to raise the value of the dollar?

Economics Economics Questions
1

I just argued in a debate on another forum that the American Dollar was unfortunately under threat of depreciation, not least because of the massive increase in the money supply under Bernanke’s chairmanship of the FED. I added that this was why China was floating the idea of a new reserve currency since they were concerned that their investment in dollar based reserves was under threat (i.e., depreciation of the dollar would reduce the value of their assets).

I got this response:

"To a degree the dollar could go down, but all Bernanke has to do along with the treasury is to cancel out the Federal Reserves Debt which is larger than China’s own, and that would raise the value of the dollar. "

Can someone tell me what this means? Presumably Fed Reserve Debt is a reference to the holdings they have of Treasury Securities which they are starting to buy as part of the various stimulus packages. What does it mean to “cancel [this debt] out”, how would the fed do that - the way the guy has phrased it here makes it sound rather easy - and would that raise the value of the dollar as easily as he implies???

Sorry if this is all rather obvious but I is confused!!

2

Eh, I don’t know. The only way the Fed can lower the money supply is by selling assets, that could be what he means. I don’t think the Fed has much assets.

3

FED has lot of assets, though most of it is of questionable quality. FED will let some of his credits simply die naturally by not extending them. Lot of money has been loaned on short term. It can try to sell other assets as soon as markets stabilise. If not, I think that US taxpayers will come to the rescue. Treasury will issue new debt, FED will sell it in the open market and money will be simply parked in the FED’s reserves. Then during some time period, Treasury will buy back its own debt back with that money. The interest on that in the mean time will be paid by US taxpayers.

4

Me thinks FED is in trouble, but they don’t know that yet. [:P]

5

Actually, I think they do. I do not think they understand why.