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Thread: Should the Fed record dollars as equity or as liabilities?

  1. #1

    Default Should the Fed record dollars as equity or as liabilities?

    Currently, they record dollars as liabilities. To me this is a mistake as it is deceptive and allows the Fed to coverup a lot waste and mismanagement.

    Here is how it works currently:

    Fed starts with x assets = y liabilities + z equity

    They go onto the open market and acquire say 1 million in t-bill assets and balance this by adding 1 million in dollar liabilities (either dollar bill liabilities or electronic deposits at the Fed liabilities).

    This is a very bad way to do this. Say the Fed creates 1 trillion dollars and spends all of this to get .25 trillion dollars worth of assets. They then sell the assets for .25 trillion. The balance sheet will not reflect that 1 trillion dollars was created...nor would the income statement.

    So their accounting looks like this:

    To acquire the over-priced securities:
    assets (+=1 trillion) = liabilities (+=1 trillion in dollar deposits) + equity
    Then once they sell their over-priced securities:
    assets (-=1trillion) = liabilities (-=.25 trillion) + equity (-=.75trillion losses)
    The proper way would be to record dollars initially as equity (not liabilities) as they are no longer redeemable in gold. For example...if you find a wad of cash on the ground...or buried treasure...or you counterfeit a bunch of money. ...And you are a company practicing standard accounting... You don't list the money as a liability...you list it as equity. A not-for profit company would do the same. The Federal reserve should be nothing but a huge not-for profit company that we control.

    Here is how the Fed should account for new money (say a trillion dollars):

    assets (+=1 trillion dollars) = liabilities + equity (+= 1 trillion in counterfeited capital)
    Now I buy some securities:

    assets (-=1 trillion dollars, +=1 trillion securities = liabilities + equity
    Now I sell my security at a huge loss (75% down):

    assets (-=1 trillion securities,+=.25 trillion dollars) = liabilities + equity (-=.75 in security losses)
    What's the difference between the two?

    In the first, income would be reported as a loss... 0 equity - .75 trillion in loan losses = .75 in negative income.

    In the second, income would be reported as: +1 trillion in dollars - .75 trillion in loan losses = .25 trillion in profit.

    Why is this important? The Fed is supposed to give their annual profits after operational expenses and bank dividends to the Congress/Treasury department to be included into the budget. If they under report profits...they don't have to give us the taxpayer as much money. Switching equity to liabilities is not an old trick...tax evaders use it all the time to reduce the amount of taxes they pay...and it appears the Fed is doing the same. This allows the Fed to play financial games mismanaging assets they shouldn't be juggling...and represents a serious time loss to the tax payer. If I as the tax payer have the choice between paying taxes and paying down my debt...and I have to pay taxes...the time value of these lost payments is significant. Yes, the Fed will invest some of the assets in income bearing instruments but that is below the market-rate and the money in the open market would have been much more efferently invested and allocated.
    Last edited by rpwi; 05-05-2012 at 10:56 AM.



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  3. #2

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    I believe there's a critical flaw in that argument.
    You assume that that .25 trillion would be left as it is when in fact, it doesn't always work like that. Fed creates money to address specific purposes so the 1 trillion (in your example) would be created to buy those bad securities, & when they are eventually sold, even at below their book price, the whole 1 trillion on both sides of the balance sheet will be written off UNLESS they think they need that .25 trillion in the system to put somewhere else, be it to loan it to some institution(s) or buy Treasuries or whatever, but other than that once those bad securities are sold, there would be no purpose in having any part of that 1 trillion on the books.

    Remember, there were reports that Fed has loaned trillions & trillions to institutions all over the world, how did it not spark hyperinflation? Well, they weren't lent at the same time but over a period of time, where money was created, lent, repaid & destroyed/written-off & so on over a period

    As for the notes & electronic deposits, here's how it works :
    http://www.federalreserve.gov/moneta...iabilities.htm

    Federal Reserve notes, net of Federal Reserve Bank holdings


    Historically, Federal Reserve notes have been the largest liability on the Federal Reserve's balance sheet. A U.S. depository institution, when it needs more currency to meet its customers' needs, asks a Reserve Bank to send it more Federal Reserve notes. The Reserve Bank ships the currency to the institution and debits the institution's Federal Reserve account by the amount shipped. Thus, an increase in Federal Reserve notes outside of the Reserve Banks is matched, in the first instance, by a reduction in the quantity of reserve balances that banks and other depository institutions hold in their Federal Reserve accounts. Similarly, a depository institution that finds that it has more Federal Reserve notes on hand than it needs to meet its customers' needs generally returns the extra currency to a Reserve Bank; the Reserve Bank credits the institution's account so the liability side of the Federal Reserve's balance sheet shows a reduction in Federal Reserve notes outstanding and a matching increase in reserve balances held by depository institutions.

    The quantity of Federal Reserve notes held by the public has grown over time. Absent any additional action by the Federal Reserve, the increase in Federal Reserve notes would reduce the quantity of reserve balances held by depository institutions and push the federal funds rate above the target set by the Federal Open Market Committee (FOMC). To prevent that outcome, the Federal Reserve engages in open market operations to offset the reduction in reserve balances.
    Anyways, +1 for asking this question, I think it's important that such questions are asked & debated to add to the intellectual depth of this movement; understanding the system in detail will aid us in pointing out its flaws more clearly than us just getting cozy with every conspiracy theory out there just for the sake of re-establishing our dislike for the system
    There is enormous inertia a tyranny of the status quo in private and especially governmental arrangements. Only a crisis actual or perceived produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  4. #3

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    I'd prefer they record them as ounces. /HR 1098
    I compiled a "brief" history of events since October 2008 that are defining the global currency war and the role that gold is playing:

    Tin Foil Hats, Economic Reality and the Total Perspective Vortex

    Also, have you contacted your Congressional Rep and asked them co-sponsor Ron Paul's Rep. Paul Broun Jr.'s HR 1098 77: Free Competition in Currencies Act?

  5. #4

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    FRNs shall be obligations of the United States and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues. They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank.
    Quiz: Test Your "Income" Tax IQ!

    Short Income Tax Video

    The Income Tax Is An Excise, And Excise Taxes Are Privilege Taxes

    The Federalist Papers, No. 15:

    Except as to the rule of apportionment, the United States have an indefinite discretion to make requisitions for men and money; but they have no authority to raise either by regulations extending to the individual citizens of America.

  6. #5

    Default Should the Fed record dollars as equity or as liabilities?

    I prefer they claim them as capital gains.

  7. #6

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    They aren't recorded as anything until after the Fed spends them.

  8. #7

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    Quote Originally Posted by Paul Or Nothing II View Post
    I believe there's a critical flaw in that argument.
    You assume that that .25 trillion would be left as it is when in fact, it doesn't always work like that. Fed creates money to address specific purposes so the 1 trillion (in your example) would be created to buy those bad securities,
    Agreed

    & when they are eventually sold, even at below their book price, the whole 1 trillion on both sides of the balance sheet will be written off
    Both sides yes...but not evenly between assets/liabilities/equity.

    The asset side would definitely be lowered by 1 trillion. However, the liabilities can not be lowered by a trillion dollars...because there is still .75 trillion in 'dollar liabilities' floating around in the outside market (remember we only got .25 trillion back in dollars. So with the 'dollar liabilities'...we will definitely decrease this by .25t (thus destroying the monetary base). However, from a double-book keeping perspective...that remaining .75 trillion has to be made up on the finance side of the ledger...so it would come out of equity. This is standard in corporations...bad loans come out of equity and hurt profits.

    UNLESS they think they need that .25 trillion in the system to put somewhere else, be it to loan it to some institution(s) or buy Treasuries or whatever, but other than that once those bad securities are sold, there would be no purpose in having any part of that 1 trillion on the books.
    Agreed that the .25 trillion get 'destroyed' when it is repaid. However, the loan loss is reflected in equity and therefore profits.

    Remember, there were reports that Fed has loaned trillions & trillions to institutions all over the world, how did it not spark hyperinflation? Well, they weren't lent at the same time but over a period of time, where money was created, lent, repaid & destroyed/written-off & so on over a period
    Yeah...big problem...because it results in churning. The Fed pulls other tricks of course like asset swaps that allow them to do bailouts in secret.

    The gist of my argument is this. In accounting, there are two ways to finance a company. Liabilities and equity. They can both do the trick and both have their pros and cons. The issue is that liabilities are supposed to be external sources of financing whereas equity is not. By the Fed claiming what should be equity as a liability they lower the amount of profits they report and thus enable them to oversee more assets and to send less money to congress.

  9. #8

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    Quote Originally Posted by Domalais View Post
    They aren't recorded as anything until after the Fed spends them.
    Well yes (aside from coinage which works in reverse on the balance sheet). They shouldn't though. If a corporation find 1 millions dollars in a treasure chest...that is supposed to be recorded right-away as asset/equity entries. If the corporation then buys assets with their new money...that is merely an asset swap. If their assets go bad...that come off of assets and off of equity as a loss...which counteracts the gain from discovered treasure.

    The Fed should absolutely use the same measure of accounting. It is not honest to count dollars as liabilities when they should be classified as equity.

  10. #9

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    Quote Originally Posted by Domalais View Post
    They aren't recorded as anything until after the Fed spends them.
    Exactly, there's no point in recording it until it's spent!

    Quote Originally Posted by rpwi View Post
    The asset side would definitely be lowered by 1 trillion. However, the liabilities can not be lowered by a trillion dollars...because there is still .75 trillion in 'dollar liabilities' floating around in the outside market (remember we only got .25 trillion back in dollars.
    Once the securities are sold at below the book price - the "loss" - those .75 trillion in your example, will then one way or another form the part of banks' "reserves", which are supposed to be Fed's liabilities anyways

    Now, if they want to reduce this increased moneysupply then they'll have to start selling other assets like Treasuries & such & thereby reduce moneysupply
    There is enormous inertia a tyranny of the status quo in private and especially governmental arrangements. Only a crisis actual or perceived produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  11. #10

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    Quote Originally Posted by Paul Or Nothing II View Post
    Exactly, there's no point in recording it until it's spent!
    That's not necessarily true. When the Federal Reserve buys t-bills on the open market...while the MB creation and t-bill purchase happens at the same time...this should be considered two accounting transaction and not one. If the Fed were a private company (Counterfeiter Inc.) it would be considered two transactions. The first would be the act in creating money...then the second would be to exchange the dollars for t-bills.

    An illustrative example would be how coinage is accounted for at the Fed. The Fed does properly count this as an asset (where as with dollars they are never counted as assets). The accounting for this is also a two stage-process...once to create the coins at the Treasury...then another for the Fed acquire the coins from the Treasury. Now the Fed doesn't count the claim on coinage as equity...but as a liability because the treasury department gets to create form of money...in this case this is call proper accounting. But because the Fed creates dollars (except coins) internally, it the claims should be counted as equity and not liabilities.

    Once the securities are sold at below the book price - the "loss" - those .75 trillion in your example, will then one way or another form the part of banks' "reserves", which are supposed to be Fed's liabilities anyways.
    I disagree. Certainly the outstanding .75 trillion needs to remain on the balance sheet. However on the 'claim side' of the ledger it belongs to equity and not liabilities. Why is this important? Well in both ways...money and transactions are accounted for. But by conflating equity and liabilities...you distort profits (and therefore remittances to the congress). Think of it this way... If a counterfeiter creates 1 million dollars and then loses .5 million dollars... What was his profit? Was it +.5 million or -.5million? It most certainly was +.5 million because the act of money was itself a profitable venture (which is self-evident). If a company tried to file the latter to the IRS, they would be charged with tax fraud.

    Now, if they want to reduce this increased moneysupply then they'll have to start selling other assets like Treasuries & such & thereby reduce moneysupply
    They could. But you do not need to sell assets to reduce the money supply. Just as you do not need to buy assets to increase the money supply. For example...say the Fed takes 1 billion they acquired in interest income...on the balance sheet...1 billion in dollar liabilities is wiped out and a 1 billion dollar credit is added to equity.

  12. #11

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    Quote Originally Posted by rpwi View Post
    If a counterfeiter creates 1 million dollars and then loses .5 million dollars... What was his profit? Was it +.5 million or -.5million? It most certainly was +.5 million because the act of money was itself a profitable venture (which is self-evident).
    Ok, let's you're Fed, & now you buy assets from Bank A at 1 trillion, so you add 1 trillion to Bank A's reserves held with you on the Liabilities side & you add 1 trillion on the Assets side as well to balance it out
    Ok, now if you sell them at .5 trillion, you will reduce .5 trillion from Bank A on the Liabilities side & reduce .5 trillion from Assets side
    What has happened in the whole process, moneysupply has increased by net .5 trillion & it now belongs to Bank A's reserves; is that good, no, because Bank A received a free .5 trillion for being TBTF but they are indoctrinated to think that it "must be done" to sustain the economy, etc etc but the point remains that technically the money no more belongs to the Fed but to Bank A
    Now, if you want to further reduce moneysupply then you will have to sell other Assets

    Quote Originally Posted by rpwi View Post
    They could. But you do not need to sell assets to reduce the money supply. Just as you do not need to buy assets to increase the money supply. For example...say the Fed takes 1 billion they acquired in interest income...on the balance sheet...1 billion in dollar liabilities is wiped out and a 1 billion dollar credit is added to equity.
    Receiving interest doesn't create any new money, it just moves the money around on the Liabilities side, that's all

    Let's say they receive 1 billion from Bank B as interest on loans, that only means taking 1 billion from Bank B's reserves & showing it as profits which will eventually be handed over to the Treasury
    Even when it receives interest from Treasury, for the moment, it will be shown as profits & eventually will be handed back to the Treasury
    Last edited by Paul Or Nothing II; 05-06-2012 at 11:21 AM.
    There is enormous inertia a tyranny of the status quo in private and especially governmental arrangements. Only a crisis actual or perceived produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  13. #12

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    Quote Originally Posted by Paul Or Nothing II View Post
    Ok, let's you're Fed, & now you buy assets from Bank A at 1 trillion, so you add 1 trillion to Bank A's reserves held with you on the Liabilities side & you add 1 trillion on the Assets side as well to balance it out
    Agreed. This is how it is done now...although IMO it should be 'financed' from the equity part of the ledger...not liabilities.

    Ok, now if you sell them at .5 trillion, you will reduce .5 trillion from Bank A on the Liabilities side & reduce .5 trillion from Assets side
    I disagree. Those assets (1 billion) have been wiped off of the books...and yet only .5 trillion in liabilities has been removed. This must be made up in equity...and is recorded as a .5 billion dollar loss. If I as a corporation buy a tractor for 50k...and then give it away...it can't still list it as an asset even though its sale price was 0. I have to write-it off...and that will come off of equity. The Fed operates in the same way.

    What has happened in the whole process, money supply has increased by net .5 trillion
    Correct. 1 trillion infusion - .5 trillion dollar contraction.

    Receiving interest doesn't create any new money, it just moves the money around on the Liabilities side, that's all
    Actually receiving interest payments decreases overall liabilities and destroys money...and to make it up...equity is credited (which is profit). So say ABC bank pays 1 million in interest to the Fed. Before the transaction the balance sheet of the bank would show reserve assets of 1 million dollars. This would correspond with reserve liability entry from the regional fed bank of 1 million dollars. The banks pays the interest... Then the bank records 1 million less in reserve assets. The Fed also reports 1 million less in reserve liabilities. Because no assets were changed this must be counteracted by an increase in liabilities or equity. It is not appropriate to increase liabilities for incoming interest payments...so the Fed lists this in the equity section as profit. Which is correct...and is how corporations do it.

    The ultimate mind-bender is...if repaying interest owed to the Fed destroys the money supply...and if open market operations didn't counter this...and the Fed didn't counter-create money to finance profits to the treasury department...what would happen once the interest payments reached critical mass and the MB just wasn't big enough to meet the interest payments?

    Even when it receives interest from Treasury, for the moment, it will be shown as profits & eventually will be handed back to the Treasury
    Interest will indeed show-up correctly as profit (well what is left of the interest after the Fed expenses it around). My contention is that the initial reserves created do not show up as profit...and therefore do not get remitted to the congress. If I were in charge of the Fed I would do a little recapitalization... I would move the reserve liabilities (paper and electronic) to the equity side of the ledger and list it has a huge one time profit. The Fed would of course then owe lots to the treasury department and would probably have to liquidate their assets to finance the remittance. Without massive amounts of assets to mismanage...the Feds ability to cause trouble decreases massively. All in all a good thing in my book.

  14. #13

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    Quote Originally Posted by rpwi View Post
    Agreed. This is how it is done now...although IMO it should be 'financed' from the equity part of the ledger...not liabilities.
    There's no question of recording it as "equity", "capital" or whatever because when Fed BUYS assets, it has to PAY, so that money goes to the bank that sold the assets to Fed, so that newly created money is supposed to belong to that bank, NOT Fed, I don't know why this is so hard to grasp!

    So when Fed pays the bank, it gets added to that bank's reserves, Fed holds all the banks reserves as Liabilities because that money is supposed to belong to those banks
    Look at the Liabilities side here - http://www.federalreserve.gov/releas...1.htm#h41tab9c
    Of course, one of the items is currency/paper-notes as you've already noticed, there are other items but notice the item "Other deposits held by depository institutions", it's about 1.5 trillion, all of that money belongs to the banks, it's held as deposit with Fed & therefore its liability for Fed because it belongs to those banks

    So when Fed buys anything, the newly created money is added to this part, because it belongs to the banks & therefore it does not belong to Fed & therefore there's no question of showing that newly created money as "equity" or "capital" or whatever
    Of course, the asset bought from the bank will go on the Assets side

    Quote Originally Posted by rpwi View Post
    I disagree. Those assets (1 billion) have been wiped off of the books...and yet only .5 trillion in liabilities has been removed. This must be made up in equity...and is recorded as a .5 billion dollar loss. If I as a corporation buy a tractor for 50k...and then give it away...it can't still list it as an asset even though its sale price was 0. I have to write-it off...and that will come off of equity. The Fed operates in the same way.
    Guess what, government has different rules for itself
    And this issue was already raised when Fed actually decided to buy those junk assets but they said, that they were hoping that they'll "stimulate" the economy enough for the prices of assets to go up to par
    Even if they don't though, it doesn't matter, may be they'll just keep showing that .5 trillion (from our example) as an asset in even though there's no ACTUAL asset there or do whatever
    But again, the point is that that 1 trillion was given to Bank A, it was added to their reserves, which belong to Bank A, NOT Fed, & let's say when Bank A bought back at .5 trillion, Fed reduced Bank A's reserves by that much, leaving Bank A with a net nice gift of the other .5 trillion for being TBTF

    Quote Originally Posted by rpwi View Post
    if repaying interest owed to the Fed destroys the money supply...and if open market operations didn't counter this
    There's no question of "open market operations", there's none of that involved when Fed receiving interest; as I've said, it basically leads to reducing the reserves of the bank that paid the interest & showing it as a profit
    There's no "open market operations", that involves buying & selling of securities & none of that is needed to receive interest & show it as profit

    Quote Originally Posted by rpwi View Post
    My contention is that the initial reserves created do not show up as profit...and therefore do not get remitted to the congress.
    Sorry but your premise itself is incorrect
    That newly created money does NOT belong to Fed, when Fed BUYS something, it has to PAY & it pays with newly created money & the seller's bank's reserves held with Fed are increased with that new money so that money isn't supposed to belong to Fed so no question of remitting it to Congress
    Last edited by Paul Or Nothing II; 05-06-2012 at 02:47 PM.
    There is enormous inertia a tyranny of the status quo in private and especially governmental arrangements. Only a crisis actual or perceived produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  15. #14

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    Paper money that is loaned into existence by a bank is always recorded as a liability. Originally it was a genuine liability in the sense that it obligated the bank to redeem the notes in gold or silver on demand. The principles of double entry bookkeeping still require that it be recorded as a liability. The Fed puts the money into accounts that belong to other entities (the Treasury, Goldman Sachs, etc.).

    I have not read the messages here. Lazy me. But I see the word "equity." I will point out that equity is itself a liability - a liability to the stockholders. In companies that have no stockholders, it is usually called "bank" rather than "equity," but it is always recorded as a liability, to balance the assets that contribute to the equitable interest of the owners.

  16. #15

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    Quote Originally Posted by Paul Or Nothing II View Post
    There's no question of recording it as "equity", "capital" or whatever because when Fed BUYS assets, it has to PAY, so that money goes to the bank that sold the assets to Fed, so that newly created money is supposed to belong to that bank, NOT Fed, I don't know why this is so hard to grasp!
    When you pay for something...you just swap assets. Before that, the assets come into existence from financing...debt or equity. The Fed merges this process with their acquisition of t-bills so they confuse the issue...but ultimately when they create money...and swap money for assets...the claim on those assets should be from equity and not liabilities. There is no disagreement that the bank owns the money. The disagreement is over who owns the t-bills that the Fed purchased. Using Fed accounting...it makes it look like an outside entity does which artificially deflates profits.

    So when Fed pays the bank, it gets added to that bank's reserves, Fed holds all the banks reserves as Liabilities because that money is supposed to belong to those banks
    Back to the counterfeiting example... If I fabricate X dollars...that needs to go to equity. Then if I swap those dollars for assets...that is merely a change in assets. What I would have on the books would be X in assets matched by X in equity. It would make no sense to classify the counterfeited dollars as a liability...as no external entity financed my counterfeiting. What would be the difference then between a not-for-profit counterfeiting operation that is loosely controlled by taxpayers and the Fed? If little...then why should they be accounted for differently?

    all of that money belongs to the banks, it's held as deposit with Fed & therefore its liability for Fed because it belongs to those banks
    It's not a true liability. The money does indeed belong to the bank (well the depositor...but that's a different story). The money is not being loaned from the bank to the Fed.

    So when Fed buys anything, the newly created money is added to this part, because it belongs to the banks & therefore it does not belong to Fed & therefore there's no question of showing that newly created money as "equity" or "capital" or whatever
    Of course, the asset bought from the bank will go on the Assets side
    Say you found 10000 dollars buried in your back yard. How would you account for that using double-entry bookkeeping?

    Guess what, government has different rules for itself
    And this issue was already raised when Fed actually decided to buy those junk assets but they said, that they were hoping that they'll "stimulate" the economy enough for the prices of assets to go up to par
    Even if they don't though, it doesn't matter, may be they'll just keep showing that .5 trillion (from our example) as an asset in even though there's no ACTUAL asset there or do whatever
    They would absolutely not do that as it has to be reported as a loss on earnings. So the entire book value of the asset would be wiped...and what couldn't be salvaged...would have to come out of equity.

    But again, the point is that that 1 trillion was given to Bank A, it was added to their reserves, which belong to Bank A, NOT Fed, & let's say when Bank A bought back at .5 trillion, Fed reduced Bank A's reserves by that much, leaving Bank A with a net nice gift of the other .5 trillion for being TBTF
    Question is not who owns the dollars...it is who owns the t-bills at the Fed.

    There's no question of "open market operations", there's none of that involved when Fed receiving interest; as I've said, it basically leads to reducing the reserves of the bank that paid the interest & showing it as a profit
    There's no "open market operations", that involves buying & selling of securities & none of that is needed to receive interest & show it as profit
    Directly, no. Interest repaid doesn't involve really the open market. However...once interest is repaid...it will dry up the banking system of those reserves. With reserves being more scare...the market rate for reserves will go up. Once this goes up...this triggers the Fed to buy (or buy at a faster rate) enough t-bills to rebalance the amount of reserves in the banking system.

    Sorry but your premise itself is incorrect
    That newly created money does NOT belong to Fed,
    It should. Accounting aside...if the Fed just one day out of the blue creates 1 billion dollars...who is the rightful owner? If the Fed swaps those dollars for t-bills...who is the rightfull owner of those t-bills?

  17. #16

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    Quote Originally Posted by Jive Dadson View Post
    Paper money that is loaned into existence by a bank is always recorded as a liability. Originally it was a genuine liability in the sense that it obligated the bank to redeem the notes in gold or silver on demand. The principles of double entry bookkeeping still require that it be recorded as a liability. The Fed puts the money into accounts that belong to other entities (the Treasury, Goldman Sachs, etc.).

    I have not read the messages here. Lazy me. But I see the word "equity." I will point out that equity is itself a liability - a liability to the stockholders. In companies that have no stockholders, it is usually called "bank" rather than "equity," but it is always recorded as a liability, to balance the assets that contribute to the equitable interest of the owners.
    +1

    Quote Originally Posted by rpwi View Post

    It should. Accounting aside...if the Fed just one day out of the blue creates 1 billion dollars...who is the rightful owner? If the Fed swaps those dollars for t-bills...who is the rightfull owner of those t-bills?
    Sorry but there's a grave misunderstanding on your part, with regards how the system works

    As I have already explained several times, when Fed buys T-bills from Bank A, newly created money will be added to Bank A's reserve-account (which belongs on Fed's Liabilities side because it's Bank A's money, NOT Fed's) & the T-bills go on Fed's Assets side - http://www.federalreserve.gov/releas...41.htm#h41tab9

    Remember, that money came into existence when Fed bought those T-bills, that money didn't exist before

    When Fed sells those T-bills, it will get rid of them from their Assets side & on Liabilities side, they'll reduce Bank A's reserves to that extent as payment, & poof, that money doesn't exist anymore, it's gone where it came from - "thin air" - that's how Fed reduces moneysupply by selling their assets
    Last edited by Paul Or Nothing II; 05-07-2012 at 01:07 AM.
    There is enormous inertia a tyranny of the status quo in private and especially governmental arrangements. Only a crisis actual or perceived produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  18. #17

    Default Paul or Nothng II is correct

    Next topic...

  19. #18

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    Quote Originally Posted by Jive Dadson View Post
    Paper money that is loaned into existence by a bank is always recorded as a liability.
    A loan is an asset for a bank.
    Quiz: Test Your "Income" Tax IQ!

    Short Income Tax Video

    The Income Tax Is An Excise, And Excise Taxes Are Privilege Taxes

    The Federalist Papers, No. 15:

    Except as to the rule of apportionment, the United States have an indefinite discretion to make requisitions for men and money; but they have no authority to raise either by regulations extending to the individual citizens of America.

  20. #19

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    Quote Originally Posted by Paul Or Nothing II View Post
    Sorry but there's a grave misunderstanding on your part, with regards how the system works

    As I have already explained several times, when Fed buys T-bills from Bank A, newly created money will be added to Bank A's reserve-account (which belongs on Fed's Liabilities side because it's Bank A's money, NOT Fed's) & the T-bills go on Fed's Assets side - http://www.federalreserve.gov/releas...41.htm#h41tab9

    Remember, that money came into existence when Fed bought those T-bills, that money didn't exist before

    When Fed sells those T-bills, it will get rid of them from their Assets side & on Liabilities side, they'll reduce Bank A's reserves to that extent as payment, & poof, that money doesn't exist anymore, it's gone where it came from - "thin air" - that's how Fed reduces moneysupply by selling their assets
    Well...I think there is some wire-crossing here... You can reread all my posts. No where have I suggested otherwise that the Fed accounts for MB creation in different manner CURRENTLY. I am also very aware of the 'Consolidated Statement of Condition' the Fed's pseudo-balancesheet...so you do not need to keep pointing it out. You need to respond to what I wrote and not what you thought I wrote (same for you Jive). If you reread all the posts in this thread carefully, you will see you were arguing a non-issue.

    What I have advocated is that the Fed SHOULD account for MB creation differently. First the act of creating MB should be an entry in and of itself apart from the t-bill acquisition. Secondly, it should be accounted for as equity and not as a liability. The reason being that it will more accurately represent the profit that the Fed earns and thus must turn over to congress.

  21. #20

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    Here's an illustration


    Premise :
    Code:
    Liabilities                                         Assets
    Currency in circulation - 1 trillion                   Treasuries/US debt - 2 trillion
    All banks' reserves - 1 trillion
    Now, Fed buys MBS from banks at 1 trillion
    Code:
    Liabilities                                         Assets
    Currency in circulation - 1 trillion                   Treasuries/US debt - 2 trillion
    All banks' reserves - 2 trillion                         MBS - 1 trillion



    Case 1 : Fed is able to sell MBS at par at 1 trillion
    Code:
    Liabilities                                         Assets
    Currency in circulation - 1 trillion                   Treasuries/US debt - 2 trillion
    All banks' reserves - 1 trillion
    Case 2 : Fed sold MBS at a profit
    Code:
    Liabilities                                         Assets
    Currency in circulation - 1 trillion                   Treasuries/US debt - 2 trillion
    All banks' reserves - 0.9 trillion
    Profits/Treasury A/c - 0.1 trilllion
    Case 3 : Fed sold MBS at a loss
    Code:
    Liabilities                                         Assets
    Currency in circulation - 1 trillion                   Treasuries/US debt - 2 trillion
    All banks' reserves - 1.5 trillion                      Losses/Treasury A/c - 0.5 trillion
    Last edited by Paul Or Nothing II; 05-09-2012 at 01:23 PM.
    There is enormous inertia a tyranny of the status quo in private and especially governmental arrangements. Only a crisis actual or perceived produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  22. #21

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    Quote Originally Posted by Danke View Post
    A loan is an asset for a bank.
    The note (IOU) is an asset. The money loaned, when the bank puts it into the borrower's account, is a liability.

    Paul Or Nothing II is right. He has admirable patience too.
    Last edited by Jive Dadson; 05-07-2012 at 02:40 PM.

  23. #22

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    Quote Originally Posted by Jive Dadson View Post
    The note (IOU) is an asset. The money loaned, when the bank puts it into the borrower's account, is a liability.

    Paul Or Nothing II is right. He has admirable patience too.
    Yes, a deposit is a liability. But a loan is an asset.
    Quiz: Test Your "Income" Tax IQ!

    Short Income Tax Video

    The Income Tax Is An Excise, And Excise Taxes Are Privilege Taxes

    The Federalist Papers, No. 15:

    Except as to the rule of apportionment, the United States have an indefinite discretion to make requisitions for men and money; but they have no authority to raise either by regulations extending to the individual citizens of America.

  24. #23

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    Quote Originally Posted by Paul Or Nothing II View Post
    Again, you're not understanding that money-creation solely happens by buying something,
    That is not true. If I counterfeit 100 dollars...that is profit now. What I do with the 100 dollars (like swap it for another asset) should be a separate transaction. You have not honestly answered this hypothetical situation which I have posed repeatedly and I insist you do now. If a corporation 'discovers' 10 million dollars...should this be accounted as a equity gain immediately..or only count only on the books once this money is spent? Using your logic the money would never count as profit.

    so there's no "profit" to be had in the first place, the newly created money goes straight to the seller selling the T-bill or whatever, & when it's sold back into the market, the money is written off from both sides of the sheet
    That's how it happens now. Yes. (Well only for when the security is sold at book value)

    ...
    You keep repeating these examples...I understand the process most thoroughly I assure you. And it is a way to do it...but it does not properly reflect the correct source of financing and subsequently distorts the actual profits the Fed reports. I would account roughly the same as you describe...but I would first break the MB creation into one entree...then the MB for t-bill transaction as a separate entree. The source of financing would be equity and not liabilities. Answer my countefetting example, and you'll understand.

  25. #24

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    Quote Originally Posted by Danke View Post
    FRNs shall be obligations of the United States and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues. They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank.
    The problem with it is that the public cannot get to the teller window to get the real US currency in exchange for FRN's. If we could find somebody who could do this they could make a bundle on a 1% surcharge.

    Rev9
    Drain the swamp - BIG DOG
    http://mindreleaselabs.com/
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  26. #25

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    Quote Originally Posted by Revolution9 View Post
    The problem with it is that the public cannot get to the teller window to get the real US currency in exchange for FRN's. If we could find somebody who could do this they could make a bundle on a 1% surcharge.

    Rev9
    You can always trade your FRNs for PMs. The trouble becomes getting people to accept PMs as payment. I would accept PMs, but most people don't know how to think in such terms anymore. I'm also semi-sure you don't have to pay taxes on exchanges in PMs, as the government considers it "barter".
    Last edited by heavenlyboy34; 05-07-2012 at 03:35 PM.
    Quote Originally Posted by Ron Paul
    The government is incapable of doing what it's supposed to do. A job like the provision of security is something best left to private institutions.
    My music/art page is here"government is the enemy of liberty"-RP
    That which doesn't kill me has made a grave tactical error
    Quote Originally Posted by Anti Federalist View Post
    This whole board is a thoughtcrime in progress.
    Quote Originally Posted by danke View Post
    I carry my man purse for fashion, not function.

  27. #26

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    Quote Originally Posted by rpwi View Post
    [...] You have not honestly answered this hypothetical situation which I have posed repeatedly and I insist you do now. If a corporation 'discovers' 10 million dollars...should this be accounted as a equity gain immediately..or only count only on the books once this money is spent?
    Probably he is ignoring the hypothetical question because it has absolutely nothing to do with the original question. I can answer it. In a perfect world, the "transaction" would result in two entries, one on the asset side and one on the liability side. On the asset side would be the $10 million added to an account called "vault." On the liability side [sic!], $10 million would be added to the account called "equity." In reality, there would be two entries on the liability side, the second being "taxes owed." But again, this is not at all the same as a bank creating new money in someone's account as a loan.
    Last edited by Jive Dadson; 05-08-2012 at 12:08 AM.

  28. #27

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    Quote Originally Posted by rpwi View Post
    That is not true. If I counterfeit 100 dollars...that is profit now.What I do with the 100 dollars (like swap it for another asset) should be a separate transaction. You have not honestly answered this hypothetical situation which I have posed repeatedly and I insist you do now. If a corporation 'discovers' 10 million dollars...should this be accounted as a equity gain immediately..or only count only on the books once this money is spent? Using your logic the money would never count as profit.
    What if you counterfeit $100 & then burn it, what's your profit? $100 or $0?

    Ok let's go along with your example, ok they create a trillion & record it as "equity", WHY? What's the point? There's no need to just create trillion, quadrillion or pentillion or whatever, & then not do anything with it!

    Corporations record EXISTING money but you're expecting Fed to record money before it even exists; it only comes into existence when the buy something

    Fed has virtually unlimited power to create money but you wouldn't expect them to record "Unlimited" as their "equity", would you? Or would you put a specific number on "Unlimited"?

    Quote Originally Posted by rpwi View Post
    distorts the actual profits the Fed reports.
    Please elaborate on "actual profits", I've already listed all the possible scenarios in the whole process & it doesn't work the way you think it does
    There is enormous inertia a tyranny of the status quo in private and especially governmental arrangements. Only a crisis actual or perceived produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  29. #28

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    Quote Originally Posted by Jive Dadson View Post
    ...On the asset side would be the $10 million added to an account called "vault." ...$10 million would be added to the account called "equity." ...
    Exactly. So logically this would be recorded as profit, right? So why doesn't the Fed list their counterfeited money as equity?

  30. #29

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    Quote Originally Posted by Paul Or Nothing II View Post
    What if you counterfeit $100 & then burn it, what's your profit? $100 or $0?
    The net profit is 0. However, you first earned the 100, then you lost the 100. You do have to account for both transactions. You can't pretend nothing happened.

    Ok let's go along with your example, ok they create a trillion & record it as "equity", WHY? What's the point? There's no need to just create trillion, quadrillion or pentillion or whatever, & then not do anything with it!
    It facilitates future transactions. You appear to be operating under the belief that something is only money if it is spent. This is not the case. The dollars in my wallet are money...even though they are not being spent. When the Fed creates dollars in their wallet...that is little different.

    Corporations record EXISTING money but you're expecting Fed to record money before it even exists; it only comes into existence when the buy something
    Not true. The Fed certainly creates the money at the same time the t-bills are acquired which creates the illusion that MB creation is dependent on t-bill acquisition but this is not true. If a counterfeiter creates his money at the very momentum he purchases an asset...that shouldn't and wouldn't be merged into one book-keeping transaction...but kept at two book-keeping transactions.

    Fed has virtually unlimited power to create money but you wouldn't expect them to record "Unlimited" as their "equity", would you? Or would you put a specific number on "Unlimited"?
    The fed would not list their potential on the equity side...just the records of what they've added destroyed would be added their.

    Please elaborate on "actual profits", I've already listed all the possible scenarios in the whole process & it doesn't work the way you think it does
    When MB is created...if it is assigned as a liability instead of an equity...none of that will count for earnings. This is accounting 101.
    Last edited by rpwi; 05-08-2012 at 12:11 PM. Reason: typo regarding t-bills

  31. #30

    Default

    Quote Originally Posted by rpwi View Post
    It facilitates future transactions. You appear to be operating under the belief that something is only money if it is spent. This is not the case. The dollars in my wallet are money...even though they are not being spent. When the Fed creates dollars in their wallet...that is little different.
    The dollars in your wallet are in circulation. Funds unspent by the Fed are not money, and certainly not assets.

    Quote Originally Posted by rpwi View Post
    Not true. The Fed certainly creates the money at the same time the t-bills are created
    No. I don't think you understand the process. T-bill creation and expansion of the money supply have absolutely nothing to do with each other. The Treasury can sell bonds all day long with no Fed involvement whatsoever, and no expansion of the money supply. It's only when the Fed purchases those securities (usually from a private bank) that money is created.

    Quote Originally Posted by rpwi View Post
    which creates the illusion that MB creation is dependent on t-bill acquisition but this is not true.
    Not sure what you're saying here. Open market operations are the primary means by which the Fed manages the money supply. There are other tools in the Fed's arsenal, such as a change in the required reserve ratio, but they are rarely used.


    Quote Originally Posted by rpwi View Post
    If a counterfeiter creates his money at the very momentum he purchases an asset...that shouldn't and wouldn't be merged into one book-keeping transaction...but kept at two book-keeping transactions.
    A counterfeiter produces a product: hard currency. The Fed produces nothing, and it purchases assets with nothing. It has infinite amounts of nothing as assets held in reserve.

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