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:Then once they sell their over-priced securities:assets (+=1 trillion) = liabilities (+=1 trillion in dollar deposits) + equityThe 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.assets (-=1trillion) = liabilities (-=.25 trillion) + equity (-=.75trillion losses)
Here is how the Fed should account for new money (say a trillion dollars):
Now I buy some securities:assets (+=1 trillion dollars) = liabilities + equity (+= 1 trillion in counterfeited capital)
Now I sell my security at a huge loss (75% down):assets (-=1 trillion dollars, +=1 trillion securities = liabilities + equity
What's the difference between the two?assets (-=1 trillion securities,+=.25 trillion dollars) = liabilities + equity (-=.75 in security losses)
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.