I continue to hear that what the Fed is doing, specifically with FNMA, FHLMC, AIG etc is inflationary. Can you help me understand a bit better? 1.) Has the Fed been financing all of its activities from its existing balance sheet? For example the 85 billion in loans to AIG. Where will the Fed get the money to send to AIG? Selling Treasuries they own? 2.) If the Fed balance sheet does become distressed, how does it expand its balance sheet? Do they just create a journal entry with no corresponding liability offset? IE Debit Credit Cash on hand 50Bil Magic 50 Bil 3.) What have the actions in the capital markets this year by the Fed done to the National debt? Has debt financed any of this? How? Thanks for helping me understand.
Answers for 1) 2) & 3) Borrow from the Chinese.
Like this? 1.) Have T Auction. Sell 20 B Bills/Notes Etc 2.) Foreigners buy them 3.) Draw 20 B in reserves from accounts of Primary dealers to pay for it. 4.) Take money removed from primary dealers reserve accounts and use it to buy Treasuries via open market operations to increase money supply. How does this do anything? Take money out to put it back in? Isn’t this a wash? I don’t see how this changes the money supply. Can you explain?
1morelevel Wrote: ------------------------------------------------------- > 1.) Has the Fed been financing all of its > activities from its existing balance sheet? For > example the 85 billion in loans to AIG. Where > will the Fed get the money to send to AIG? > Selling Treasuries they own? think of the fed’s assets as consisting of infinite cash + its securities portfolio every time the fed uses cash to lend into a bank, or purchases something in the economy, it is injecting that cash into the system and ‘creating new money’/increasing money supply. every time the fed gets cash in from the system by selling from its securities portfolio, it reduces money supply. so, the fed can choose to create fresh money (lend to AIG out of its infinite pool of cash) or can be money supply neutral by selling its securities, sucking out cash, and lending that same cash back to AIG, thus returning it into the system. i am trying to understand which approach they will take, still unclear to me. > > 2.) If the Fed balance sheet does become > distressed, how does it expand its balance sheet? > Do they just create a journal entry with no > corresponding liability offset? > > IE Debit > Credit > Cash on hand 50Bil > Magic > 50 Bil > they just access the infinite cash if they want to make fresh money. or for money supply neutral approach, they must use their securities portfolio to generate cash. which puts a cap on their ability to conduct bailouts - the size of their securities portfolio. however, there are ways around it. it involves the treasury. the treasury can issue new debt, and the cash proceeds can be deposited w the fed. that cash can then be recycled back into the system. note that this is money supply neutral but the size of the federal debt increases, which has its own implications. > 3.) What have the actions in the capital markets > this year by the Fed done to the National debt? > Has debt financed any of this? How? bear - fed provided loan, treasury sold credit put - will pick up first 29B in losses for JPM fannie freddie - fed not involved, treasury gave 200B credit line effectively merrill - no govt involvement lehman - no govt involvement AIG - fed providing loan in fannie freddie and AIG, treasury picked up 80% equity via warrants (as i understood, warrant exercise price is nominal 1 cent or something). so no immediate cash implication of that transaction. still making sense of the details, but thats the broad sense i get. others please feel free to clarify / add / correct…
Thanks Rohufish. That helps but I’m still not fully getting it. I don’t understand this endless balance sheet. I have heard this said, but from an accounting perspective I don’t get it. So Fed has a balance sheet, on asset is cash. Ben just goes in the computer and changes the number as needed? Just adds 50 billion to the total? No offsetting transaction? How do they balance? So AIG for instance…AIG has account at JP Morgan lets say. Fed adds 80 Billion in reserves to account of JP Morgan, for credit to AIG Holding operating account. -The Fed doesn’t sell Treasuries to get the 80 Billion? They just “create it” I don’t get it. I also hear the phrase that the Fed is “printing money”. I assume this is figurative because I don’t think that they are actually printing paper to offset money creation, are they? When they say the Fed is printing money, what does this mean?
1morelevel, Try to understand it like this. The money created is an asset. The liability is the need to redeem it. However as it is not backed by gold they can limitlessly add to their liability by creating/printing cash(assets). For example the liability is the promise to pay you the sum of a dollar if you give them a dollar note. It is backed by fiat.
Fed doesn’t have to report its financial statements to anybody, not even to the government. There are plenty of theories/speculations on the going-ons inside Fed. Just check out amazon.com for books on Fed. Fed has tremendous power to raise money. They can sell bonds, treasuries to raise cash. Or they can print money literally. All this is backed by the faith in US dollar, which is in turn backed by the gold reserves that the government claims to own. Who really knows?
itmonkey Wrote: ------------------------------------------------------- > Fed doesn’t have to report its financial > statements to anybody, not even to the government. > There are plenty of theories/speculations on the > going-ons inside Fed. Just check out amazon.com > for books on Fed. > > Fed has tremendous power to raise money. They can > sell bonds, treasuries to raise cash. Or they can > print money literally. All this is backed by the > faith in US dollar, which is in turn backed by the > gold reserves that the government claims to own. > Who really knows? What? How did you manage to be that wrong in two short paragraphs? 1.) The Fed reports its balance sheet every week. Go to federalreserve dot got and click on reports if you would like to see them. 2.) We haven’t had a gold standard in almost 40 years. While gold is part of the Fed’s assets, it does not claim to back all reserves with gold. Look up fiat money if you don’t understand. 3.) I’m well aware of the conspiracy theories out there… 4.) Actually, the mint prints money, the Fed circulates it. 5.) Selling bonds doesn’t create money.
So when the Fed “expands its balance sheet”, it has to literally buy paper money from the mint, and circulate the money, to create the offsetting liability? Ie Debit Credit Cash on hand 1B Currency outstanding 1B (note payable) Does anyone have a good reference to understand this stuff a bit more in depth? (Not a conspiracy theory book)
http://www.investopedia.com/articles/basics/03/061303.asp "Remember, as long as people have faith in the currency, a central bank can issue more of it. But if the Fed issues too much money, the value will go down, as with anything that has a higher supply than demand. So even though technically it can create money “out of thin air,” the central bank cannot simply print money as it wants. " http://wps.aw.com/wps/media/objects/2095/2146070/Ch08App.pdf “Liabilities 1. Federal Reserve notes (currency) outstanding. The Fed issues currency (those green-and-gray pieces of paper in your wallet that say “Federal Reserve note” at the top). The Federal Reserve notes outstanding are the amount of this currency that is in the hands of the public. (Currency held by depository institutions is also a liability of the Fed but is counted as part of the reserves liability.) Federal Reserve notes are IOUs from the Fed to the bearer and are also liabilities, but unlike most liabilities, they promise to pay back the bearer solely with Federal Reserve notes; that is, they pay off IOUs with other IOUs. Accordingly, if you bring a $100 bill to the Federal Reserve and demand payment, you will receive two $50s, five $20s, ten $10s, or one hundred $1 bills. People are more willing to accept IOUs from the Fed than from you or me because Federal Reserve notes are a recognized medium of exchange; that is, they are accepted as a means of payment and so function as money. Unfortunately, neither you nor I can convince people that our IOUs are worth anything more than the paper they are written on.”
So yes, Ben can create $50B out of thin air or however much he wanted to, but this would decrease the strength of our currency and printing out too much paper money is not good for an economy/central bank. The $50B that Ben makes has offsetting IOUs (Liabilities).
itmonkey Wrote: ------------------------------------------------------- > Fed has tremendous power to raise money. They can > sell bonds, treasuries to raise cash the fed does not issue bonds or treasuries. the treasury does that.