Should the Fed record dollars as equity or as liabilities?

[rpwi]

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.

[Paul Or Nothing II]

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

[Bern]

I'd prefer they record them as ounces. /HR 1098

[Danke]

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.

[Carson]

I prefer they claim them as capital gains.

[Domalais]

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

[rpwi]

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.

[rpwi]

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.

[Paul Or Nothing II]

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

Exactly, there's no point in recording it until it's spent!

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

[rpwi]

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.