Should the Fed record dollars as equity or as liabilities?

[Paul Or Nothing II]

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.

Central Banking 101

MB = All banks' reserves + Currency in Circulation + Coins

Banks' reserves belong to banks, Fed is merely holding it for them so they are Fed's liability

Currency is obtained as a loan so it's a liability

http://www.newyorkfed.org/aboutthefe...int/fed01.html

Each Federal Reserve Bank is required by law to pledge collateral at least equal to the amount of currency it has issued into circulation. The bulk of the collateral pledged is in the form of U.S. Government securities and gold certificates owned by the Federal Reserve Banks.

Coins are bought by Fed by paying the full amount so they go on the Assets side

http://www.newyorkfed.org/aboutthefe...int/fed01.html

coins are a direct obligation of the Treasury, so the Reserve Banks pay the Treasury the face value of the coins

http://www.gao.gov/products/GAO-04-283

The earnings from issuing both coins and currency reduce government borrowing costs; however, how these earnings are budgeted and accounted for differs. Production costs of coins and currency are generally treated the same in the budget and accounting statements. The difference between the face value of coins and the costs of minting them results in earnings, called seigniorage, which is shown in the budget as a reduction in needed borrowing for the government, after the deficit or surplus for the year is calculated. The budgetary impact of seigniorage is interest avoided from the borrowing it displaces and is not visible because it is neither quantified nor shown in the budget. The government also generates earnings by issuing currency, but it is handled differently. The difference between the face value of currency issued and its production cost goes to the Fed. The Fed buys collateral, usually Treasury securities, to back up the currency issued. The interest collected on those Treasury securities is used to pay for Fed costs, and the remainder is returned to Treasury.

http://www.currency-news.com/article...-december-2008

In a nutshell, central banks have the statutory right to issue banknotes, that is, in an accounting sense functioning as a debtor for the value of banknotes in circulation. The face value of the notes will be recorded as a liability on the central bank's balance sheet, matched by a corresponding asset; in other words the community provides an interest free loan to the central bank, which in turn invests these funds in income producing assets.

[rpwi]

The dollars in your wallet are in circulation. Funds unspent by the Fed are not money, and certainly not assets.

What about a counterfeiter. They counterfeit the money but haven't spent it yet. Is that money? Is that in 'circulation'?

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.

Well aware of this...I must made a stupid typo as I was in a hurry to get back to work after break. I've corrected this in the original post.

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.

Well reserve ratio wouldn't affect MB...at least not directly. What I was getting at...is the Fed has the power to create money. It is not limited to open market transactions. There is the discount window, QE and other tricks... Basically, what I'm getting at is that when the Fed creates MB this needs to be conceptualized as a separate and distinct action in order to honestly understand what is going on. Countefetting the money is one action...then trading the money for an asset is another. Yes...you can combine the the two into action...but that is deceptive and not how you're supposed to do accounting. If I trade 1k in dollars for 1k in gold and then trade for 1k in silver. I don't just replace the 1k in dollars for 1k in silver. I have to record all the transactions and as separate entities. The Fed is cheating with their shorthand trick.

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.

Well...a 'computer entry' or electronic dollar or fed reserve deposit or just 'reserve' (the terminology is confusing) is not nothing. It absolutely is potent and has value and should be recorded as such.

[Paul Or Nothing II]

Countefetting the money is one action...then trading the money for an asset is another. Yes...you can combine the the two into action...but that is deceptive and not how you're supposed to do accounting.

Ok, got it, you don't like their accounting but the point is, it doesn't change the bottomline, that is, the profit remains the same

If I trade 1k in dollars for 1k in gold and then trade for 1k in silver. I don't just replace the 1k in dollars for 1k in silver. I have to record all the transactions and as separate entities. The Fed is cheating with their shorthand trick.

Let's be a little consistent & say you buy gold worth 1k & then you sell it, what's the profit? Even if you did two separete entries, it doesn't change the profit so calling it "cheating" is a little overboard but may be accounting is something very important to you & may be that's why you feel strongly about it but again, the point is that the bottomline doesn't change

[rpwi]

Ok, got it, you don't like their accounting but the point is, it doesn't change the bottomline, that is, the profit remains the same

My issue is two-fold. First that the Fed combines MB creation with Tbill acquisition accounting-wise. Secondly, that it matches MB (and what it is swapped with) as a liability as opposed to equity. It does change profits. External sources of assets that don't come from owners nor from liabilities....is profit. Counterfeiting is profitable...so it should be recorded as such. The Fed now can only list the leveraged interest as profit as opposed to the MB it created which is incorrect.

Let's be a little consistent & say you buy gold worth 1k & then you sell it, what's the profit?

0. But if you dig up some gold from a pirate ship...that is a different matter. Sell that and profit is not 0. In fact, you don't even have to sell it to record a profit (the IRS is quite specific on this as this would not be a capital gain).

Even if you did two separete entries, it doesn't change the profit

No...but it does cover up conceptually how equity should have been used instead. And it is the conflation between equity and liabilities that confused profits.

so calling it "cheating" is a little overboard but may be accounting is something very important to you & may be that's why you feel strongly about it but again, the point is that the bottomline doesn't change

The change is quite substansial and is equal to pretty much the size of MB.

[Jive Dadson]

Exactly. So logically this would be recorded as profit, right? So why doesn't the Fed list their counterfeited money as equity?

Because the counterfeited money does not belong to the Fed. It belongs to the entity that the Fed lends it to. To the Fed it is a liability. On the other side of the ledger, the asset side, there is a corresponding entry for the borrower's note or bond or whatever.

Here is a news flash. At any given time, the Fed or the Treasury might have warehouses full of bales of hundred dollar bills that are not in circulation. They are not carried on any account, because they are monetarily meaningless. They might salvage them, or they might shred them. No difference. They can always make more. But there are rules. They cannot just make them and say, "Voila! Equity."

[Jive Dadson]

All fiat money is "borrowed into existence." It does not exist until someone borrows it from a bank, such as the Fed, and it ceases to exist when the borrower pays it back.

When the Fed lends money into existence, it creates two accounts, one on the asset side and one on the liabilities side. The asset entry represents the borrower's bond or note. The liability is the borrower's bank account, newly furnished with money from thin air. The borrower's bank account is a liability to the Fed.

Equity is a whole different thing, namely excess profit. It comes from interest, which these days is virtually zero. Profits to shareholders in the Fed are capped at 6% of their equity stake, with the remainder, if any, to be wasted by the government. Equity is itself a liability. The Fed owes it to the stock holders and the Treasury.

[rpwi]

Because the counterfeited money does not belong to the Fed. It belongs to the entity that the Fed lends it to. To the Fed it is a liability. On the other side of the ledger, the asset side, there is a corresponding entry for the lender's note or bond or whatever.

But who lent the money to the Fed? The banks? The federal government? While the accounting is setup to make it appear the banks are 'lending' dollars to the Federal Reserve, this is not the case. In no such way are dollars as MB a loan. If I use my dollars to buy some t-bills, did I loan my dollars to the seller? Are the dollars in my wallet on loan from an outside entity? No. They are distinct entities that self-exist independently on their own right. Neither are my dollars dependent on being spent to have value. My dollars in my wallet now, have value yet are not being spent.

Not to beat a dead-horse...but the counterfeiter example is most excellent...and the Fed is nothing but a very large not-for profit counterfeiter that is somewhat controlled by government. When the counterfeiter creates the dollars...they belong to him. They have value. They don't need to be spent. The act of counterfeiting 10,000 dollars makes him 10k richer. If he swaps the 10k for 10k in gold, then swaps that for 10k in silver, then 10k in gold, then 10k in tbills...none of these asset swaps earned him money. Only the counterfeiting did. The swaps would not be recorded properly as profits, but the counterfeiting would. When he swapped 10k of new money for 10k gold...the gold dealer didn't lend him 10k worth of gold. That is merely an asset swap.

Now what happens if our swapping counterfeiter records the initial counterfeited dollars a liability. He would then report no profits...even through all his swaps. Profit would only come from leverage off of the liabilities in capital gains or interest. That is not accurate...and a counterfeiter (assuming it was legal) would be locked in jail by the IRS for tax fraud.

In this manner...when MB is created...it needs to recorded as an asset (like coins) and have a corresponding equity entry. In this fashion, equity and therefore profits would be accurately recorded...and not as after-the-fact leverage from phantom financier.

[Paul Or Nothing II]

My issue is two-fold. First that the Fed combines MB creation with Tbill acquisition accounting-wise.

Because they BUY it from banks & PAY them with new money because otherwise they'd have to use either their capital or Treasury's money, which will defeat the whole purpose anyway
They record it as a liability because it's PAID to the selling bank, so the payment goes to banks' reserves & T-bill on the Assets side

Secondly, that it matches MB (and what it is swapped with) as a liability as opposed to equity.

It's NOT equity because they PAID it to someone else in return for the T-bill or whatever else; it goes on the liability side because the seller (banks) happen to hold their money with Fed

It does change profits.

No, it does NOT

Please use the illustrations I have used & show how there would more profits

Counterfeiting is profitable...so it should be recorded as such.

Counterfeiting is only profitable if you never destroy money but as I've said before, if you counterfeit $100 & then destroy it, there's no profit; if you counterfeit $100, buy a fancy chair, then sell the fancy chair & receive $100 & then destroy that $100 then there's no profit

No...but it does cover up conceptually how equity should have been used instead. And it is the conflation between equity and liabilities that confused profits.

Why can't you understand that that money is PAID by the Fed to buy the T-bills (or whatever asset)?

How do you expect money PAID to be recorded as "equity"

The change is quite substansial and is equal to pretty much the size of MB.

Again, please use B/S examples I have given earlier & make it into your own & show us how the "actual profits" differ

[Paul Or Nothing II]

But who lent the money to the Fed? The banks? The federal government?

http://www.currency-news.com/article...-december-2008

In a nutshell, central banks have the statutory right to issue banknotes, that is, in an accounting sense functioning as a debtor for the value of banknotes in circulation. The face value of the notes will be recorded as a liability on the central bank's balance sheet, matched by a corresponding asset; in other words the community provides an interest free loan to the central bank, which in turn invests these funds in income producing assets

Creating new money dilutes the purchasing-power of the people through inflation so it is essentially loan from the "community"

Fed usually doesn't buy T-bills directly from Treasury/government; Primary Dealer banks are like market-makers in government-debt, they always have some T-bills on hand & Fed buys from them as & when necessary, Fed has NO PRE-EXISTING MONEY so they PAY with newly created money, the PAYMENT is added to the Primary Dealer Banks' reserves on the Liabilities side of Fed's B/S & the T-bills are recorded on the Assets side

Banks buy T-bills with THEIR money (which ALREADY exists in the system) which they have invested or acquired from people, & then Fed buys from them with new money, Fed adds the new money to the banks as their Liability & adds the T-bills as Assets

Again, when you PAY someone & get something in return, do you regard the payment as your "equity"?

Let's say you counterfeit $100 to buy something, you get the thing & the $100 goes to the seller, how's that supposed to be your "equity"?
And let's say a while later, the seller realizes that it's a counterfeit, he asks for his goods back & hands you the shreded counterfeit $100; what's your profit?

Again, please make up your own illustrations like I have in my earlier post on page 2 & post your version of them & show us the "actual profits"

[rpwi]

Again, when you PAY someone & get something in return, do you regard the payment as your "equity"?

What you paid for the asset came from equity. The claim on the new asset should then properly come from equity and not liabilities.

Let's say you counterfeit $100 to buy something, you get the thing & the $100 goes to the seller, how's that supposed to be your "equity"?

The money is not what you're claiming. This is where you are confused. It is the t-bills.

Let's start with how the Fed SHOULD account for MB creation.

They create 10 dollars.

Assets += 10 dollars
--
Equity += 10 dollars (equity is a claim and is more abstract...it's not as if I'm storing money here)

They then buy a t-bill for 10 dollars.

Assets -= 10 dollars
Assets += Tbill worth 10 dollars

Net assets have not changed. Nor as equity with the transaction (it did when the money was created). Just that equity now lays a claim to t-bills instead of dollars. Again... Say Jo off the street exchanges dollars for t-bills...that doesn't mean, the bread-seller has loaned him dollars. The Fed should be no different. Dollars are not loans...and the Fed conceptually is not different than a not-for profit large counterfeiter. If dollars are loans...than what is their yield? What is their maturity? If they aren't loans, then how can be counted as liabilities? And don't parrot a how the Fed CURRENTLY accounts for open market transactions...explain conceptionally why and how the the accounting should take place.

And let's say a while later, the seller realizes that it's a counterfeit, he asks for his goods back & hands you the shreded counterfeit $100; what's your profit?

At that point 0.

[Paul Or Nothing II]

Let's start with how the Fed SHOULD account for MB creation.

They create 10 dollars.

Assets += 10 dollars
--
Equity += 10 dollars (equity is a claim and is more abstract...it's not as if I'm storing money here)

They then buy a t-bill for 10 dollars.

Assets -= 10 dollars
Assets += Tbill worth 10 dollars

As I've said before, Fed does NOT just create money & hold it for no reason, it is created IN THE PROCESS of buying assets but we'll skip that for the moment

Ok, let's break this down, one step at a time - from whom did Fed buy those T-bills?

[rpwi]

As I've said before, Fed does NOT just create money & hold it for no reason, it is created IN THE PROCESS of buying assets but we'll skip that for the moment

While happening technically at the same time...it is not one transaction but two accounted properly. A counterfeiter could just counterfeit the money just as he bought his t-bills...no difference.

Ok, let's break this down, one step at a time - from whom did Fed buy those T-bills?

From a primary dealer.

[rpwi]

They record it as a liability because it's PAID to the selling bank, so the payment goes to banks' reserves & T-bill on the Assets side

That's not how accounting is supposed to work. If I buy a tractor for 100k... I do not list the tractor as an asset AND list the 100k as a liability to the buyer. The buyer didn't 'lend' me those dollars.

It's NOT equity because they PAID it to someone else in return for the T-bill or whatever else; it goes on the liability side because the seller (banks) happen to hold their money with Fed

The Fed only 'holds' the money has a clerical function. The dollars in my wallet are mine...and are not loans to the Fed.

No, it does NOT

Please use the illustrations I have used & show how there would more profits

Fed wants to create 1 billion to buy t-bills.

Correct way:

Assets: += 1 billion in dollars
Equity += 1 billion in counterfeited wealth

Right there is the profit.

If I as the Fed complete the transaction:

Assets: += 1 billion in t-bills
Assets: -= 1 billion in dollars

Then I have merely swapped assets and in accrual accounting that is not profit.

Counterfeiting is only profitable if you never destroy money but as I've said before, if you counterfeit $100 & then destroy it, there's no profit; if you counterfeit $100, buy a fancy chair, then sell the fancy chair & receive $100 & then destroy that $100 then there's no profit

The Fed does not destroy all their money. The size of the monetary base is pretty much the net extent to which money has NOT been destroyed. Therefore this is unrealized profits.

Why can't you understand that that money is PAID by the Fed to buy the T-bills (or whatever asset)?

I understand...you don't understand that I understand. I am fully aware that currently when the Fed buys a t-bill they do so by increasing the liability to the primary dealer's deposit at the NY regional Federal Reserve Bank.

How do you expect money PAID to be recorded as "equity"

The money is not what the equity claims...it's the tbills (and other assets).

Again, please use B/S examples I have given earlier & make it into your own & show us how the "actual profits" differ

I have. Repeatedly. There are two ways to increase the 'finance' side of the ledger. From outside sources or from profit. No outside source provided the Fed with those dollars, so they are profit.

[Paul Or Nothing II]

From a primary dealer.

Ok, so primary dealer gives it to Fed for free?

No, they are not that generous, PDs pay to Treasury when they buy it, & then when Fed buys from PDs, Fed pays PDs with new money & hence it is added to banks' reserves, which are banks' property, of which Fed is a custodian

So essentially, you have Fed indirectly financing Treasury; PDs are just middlemen appointed to keep the markets liquid

[Paul Or Nothing II]

Let's look at a couple of examples.


Illustration 1 :
Fed buys T-bills directly from Treasury, obviously, no involvement of PDs, just Fed creating 0.5 trillion & giving it to Treasury & Treasury gives Fed T-bills in return which go on the Assets side.

Liabilities                                Assets
Currency in circulation - 1 trillion        Treasuries/US debt - 2.5 trillion
All banks' reserves - 1.5 trillion
Treasury A/c - 0 trillion

Fed buys T-bills directly from Treasury at 0.5 trillion

Liabilities                               Assets
Currency in circulation - 1 trillion         Treasuries/US debt - 3 trillion
All banks' reserves - 1.5 trillion
Treasury A/c - 0.5 trillion

Illustration 2:
Now, even in this example, the end-result is exactly the same as in the illustration 1, which is that Treasury essentially ends up with the new money created by the Fed, but the whole thing goes in a more roundabout way.
First, PDs buy from Treasury, so obviously banks' reserves are reduced & added to Treasury A/c.
Then when Fed wants to increase moneysupply, it buys from PDs with new money, so banks' reserves are increased & Fed receives the T-bills, which it adds as Assets.

Liabilities                                    Assets
Currency in circulation - 1 trillion             Treasuries/US debt - 2.5 trillion
All banks' reserves - 1.5 trillion
Treasury A/c - 0 trillion

PDs buy T-bills from Treasury at 0.5 trillion

Liabilities                                   Assets
Currency in circulation - 1 trillion             Treasuries/US debt - 2.5 trillion
All banks' reserves - 1 trillion                          
Treasury A/c - 0.5

Fed buys T-bills from PDs at 0.5 trillion

Liabilities                                    Assets
Currency in circulation - 1 trillion              Treasuries/US debt - 3 trillion
All banks' reserves - 1.5 trillion                          
Treasury A/c - 0.5

[rpwi]

Ok, so primary dealer gives it to Fed for free?

No...they exchange them for dollars of course (electric dollars...but conceptually little different than paper dollars).

[rpwi]

Let's look at a couple of examples.

Illustration 1 :
Fed buys T-bills directly from Treasury, obviously, no involvement of PDs, just Fed creating 0.5 trillion & giving it to Treasury & Treasury gives Fed T-bills in return which go on the Assets side.

While relevant points to how the treasury department could deal directly with the Fed...it is not germane to the matter at hand. The open market does not need to purchase t-bills. In fact they've batted the idea around of purchasing other assets.

If the open market purchased say silver instead and we don't even have t-bills...my critique remains. Creation and trade are erroneously combined. Then creation is not credited to equity (and instead liabilities) which deflates profits and creates a situation in which the Fed hoards assets and they can never really be properly liquidated.

Ron Paul has suggested as a measure to avoid raising the debt ceiling to wipe out part of the debt from the Fed to the US government...out of curiosity how you would account for that?

[Jive Dadson]

Rpwl, "equity" is defined as the value of an ownership interest in property, e.g. shareholders' equity in a business. Surely you do not mean to suggest that when the Fed lends out a billion dollars, that the Fed's stockholder banks immediately should be credited with a billion dollars of profit. But that is what you are saying.

Double entry bookkeeping is 100's of years old. The Fed does it the way fractional reserve banks have always done it, the way it must be done to make sense.

[Jive Dadson]

Ron Paul has suggested as a measure to avoid raising the debt ceiling to wipe out part of the debt from the Fed to the US government...out of curiosity how you would account for that?

For the record, I do not think inflation-hawk Ron Paul is serious about that, but the way it would work is this: The Fed would write off the US bonds, setting their asset value to zero. Equity [yes, equity!] would be reduced by the amount at which the bonds were previously carried. Now here is where it would get interesting. Since the Fed does the bookkeeping correctly, there surely would not be nearly enough equity to cover that gargantuan write-down. There is a word for that. The Fed would be bankrupt. Supposedly, it would go into receivership just as an ordinary failed bank would do. The current stockholders would lose all (ahem) equity. Sob. Of course that is a pipe dream.

[kuckfeynes]

...

[Paul Or Nothing II]

(electric dollars...but conceptually little different than paper dollars)

"Paper-dollars" are representation of the "electronic dollars" held by the public in the physical form

Premise :

Liabilities                                            Assets
Currency in Circulation - 1 trillion                      Treasuries/US debt - 2 trillion
All banks' reserves - 1 trillion

Now, let's say all of us decide that we won't use paper anymore, we'll deposit "paper-dollars" in our pockets & elsewhere into our banks & deal only in electronic transfers
So since paper isn't needed anymore, all the paper that we've deposited into banks, the banks will turn it over to Fed, Fed will hand it over to the Treasury & then Fed will write off "Currency in Circulation" & PAY the banks in "electronic dollars" in exchange for the "paper-dollars" & therefore add that much to the banks' reserves

Liabilities                                             Assets
All banks' reserves - 2 trillion                             Treasuries/US debt - 2 trillion

Of course, this would increase reserves, which will have to be reduced by selling Assets & both sides of the B/S would shrink to that extent BUT the main point of this illustration is to show that the "paper dollars" & "electronic dollars" are the same thing in essence

[Paul Or Nothing II]

While relevant points to how the treasury department could deal directly with the Fed...it is not germane to the matter at hand. The open market does not need to purchase t-bills. In fact they've batted the idea around of purchasing other assets.

That's not the point, you talked about T-bills so I followed up with that & showed that whether Fed buys Treasuries directly from Treasury or whether PDs first buy it from Treasury & then Fed buys from PDs; the bottomline is that Treasury is the indirect beneficiary

If the open market purchased say silver instead and we don't even have t-bills...my critique remains.

Ok, I'll indulge in your proposition & we'll see why it is wrong & it just doesn't work with the accounting

Premise :

Liabilities                                                  Assets
Currency in Circulation - 1 trillion                      Treasuries/US debt - 2 trillion
All banks' reserves - 1 trillion
TOTAL = 2 trillion                                           TOTAL = 2 trillion

As per your proposition, Fed creates 0.5 trillion for no reason at all; 0.5 trillion is added on both sides as "Equity" & "US dollars"

Liabilities                                                  Assets
Currency in Circulation - 1 trillion                     Treasuries/US debt - 2 trillion
All banks' reserves - 1 trillion                           "US dollars" - 0.5 trillion
"Equity" - 0.5 trillion
TOTAL = 2.5 trillion                                       TOTAL = 2.5 trillion

As per your proposition, Fed buys silver with those 0.5 US dollars
Remember, Fed will have to PAY for that silver so it will be paid for by adding to seller's bank account, which resides under "All banks' reserves"

Liabilities                                                   Assets
Currency in Circulation - 1 trillion                      Treasuries/US debt - 2 trillion
All banks' reserves - 1.5 trillion                         Silver - 0.5 trillion
"Equity" - 0.5 trillion
TOTAL = 3 trillion                                         TOTAL = 2.5 trillion

So now there are 3 trillion on liabilities side & 2.5 trillion on the assets side

Why? Because this simply isn't how central-banking works, the money is created IN THE PROCESS OF (NOT before) buying something or paying to someone or loaning to someone

The reason B/S is unbalanced because the way you want to account, the money is essentially created TWICE, once for creating "equity", & once again for buying silver (remember about buying things creating money), sorry but this just isn't the way it works

[rpwi]

Rpwl, "equity" is defined as the value of an ownership interest in property, e.g. shareholders' equity in a business. Surely you do not mean to suggest that when the Fed lends out a billion dollars, that the Fed's stockholder banks immediately should be credited with a billion dollars of profit. But that is what you are saying.

Banks aren't really shareholders of the Fed. The US government is the proper owner of the fed...and therefore deserves credit for the money the Fed creates. Bank dividends are no more/less with the way I would account.

Double entry bookkeeping is 100's of years old. The Fed does it the way fractional reserve banks have always done it, the way it must be done to make sense.

A trip down memory lane is needed... The Fed used to redeem dollars for gold. When this did so, listing dollars bills and dollar deposits as liabilities (while gold as assets made perfect sense). We are no longer on the gold standard. The Fed no longer needs to acquire gold from outside it's walls...instead it can 'create its own gold'. This is holdover is why the Fed's accounting is messed up and in reverse. The fed is acting as if dollars are a loan to to themselves...when in fact dollars are now base money...a distinct entity in and of it self that is nonconvertible.

[rpwi]

For the record, I do not think inflation-hawk Ron Paul is serious about that, but the way it would work is this: The Fed would write off the US bonds, setting their asset value to zero. Equity [yes, equity!] would be reduced by the amount at which the bonds were previously carried. Now here is where it would get interesting. Since the Fed does the bookkeeping correctly, there surely would not be nearly enough equity to cover that gargantuan write-down. There is a word for that. The Fed would be bankrupt. Supposedly, it would go into receivership just as an ordinary failed bank would do. The current stockholders would lose all (ahem) equity. Sob. Of course that is a pipe dream.

Ron was serious...and I wish I could remember the link. Ron's idea is terrific, avoids raising the debt ceiling for a while and I wish congress would support him on it.

Doesn't it strike you odd...that money owed from the government to the government can't be written down without causing negative equity? From an accounting perspective, Ron's plan could work. You would just move the liabilities to equity with a little 'recapitalization' first and you have the equity you need to 'properly' execute the write-down.

[rpwi]

...

So far, so good.

As per your proposition, Fed buys silver with those 0.5 US dollars
Remember, Fed will have to PAY for that silver so it will be paid for by adding to seller's bank account, which resides under "All banks' reserves"

Liabilities                                                   Assets
Currency in Circulation - 1 trillion                      Treasuries/US debt - 2 trillion
All banks' reserves - 1.5 trillion                         Silver - 0.5 trillion
"Equity" - 0.5 trillion
TOTAL = 3 trillion                                         TOTAL = 2.5 trillion

So now there are 3 trillion on liabilities side & 2.5 trillion on the assets side

And here is the problem. When the dollars were exchange silver, this was just an asset swap. Silver assets were credited by .5 trillion and dollar assets debited by .5 trillion. You snuck an extra transaction in here by adding to bank reserve liabilities. Bank reserve liabilities wouldn't exist with my system. Why should the Fed record this as a liability? If YOU buy a t-bill, do you consider your dollars spent a liability to the vendor? Certainly, the Fed needs to keep track of the location of electronic dollars (by there very nature being electronic). But in a manner more analogous to an air-traffic controller keeping track of incoming and outgoing planes, not as being on the balance-sheet.

[Paul Or Nothing II]

So far, so good.

And here is the problem. When the dollars were exchange silver, this was just an asset swap. Silver assets were credited by .5 trillion and dollar assets debited by .5 trillion. You snuck an extra transaction in here by adding to bank reserve liabilities. Bank reserve liabilities wouldn't exist with my system. Why should the Fed record this as a liability? If YOU buy a t-bill, do you consider your dollars spent a liability to the vendor? Certainly, the Fed needs to keep track of the location of electronic dollars (by there very nature being electronic). But in a manner more analogous to an air-traffic controller keeping track of incoming and outgoing planes, not as being on the balance-sheet.

All banks' reserves are held with Fed as reserves, for reserve-requirement calculations as well as for check-clearance, interbank transfers & such; it's a liability because it doesn't belong to Fed

And since the seller of silver isn't going to give it for free, he'll need to be paid into his bank account, which will be one of the banks directly or indirectly located under "All banks' reserves"

If I buy a T-bill, I don't need to record it as a liability because firstly, the seller doesn't hold his bank A/c with me but every seller has an direct or indirect bank A/c with Fed; secondly, I will be paying with money that I got by selling my goods & services, of course, Fed doesn't necessarily do that & hence it's considered a "loan" from the people

Why should the Fed record this as a liability? If YOU buy a t-bill, do you consider your dollars spent a liability to the vendor?

I've posted the following a couple of times already, here it is again for the third time, please read it

http://www.currency-news.com/article...-december-2008

In a nutshell, central banks have the statutory right to issue banknotes, that is, in an accounting sense functioning as a debtor for the value of banknotes in circulation. The face value of the notes will be recorded as a liability on the central bank's balance sheet, matched by a corresponding asset; in other words the community provides an interest free loan to the central bank, which in turn invests these funds in income producing assets

The issue seems to be that you base your views on conspiracy theories that Fed is "evil", etc etc & therefore you're unwiling to look at the issue objectively, yes, they are misguided, yes, there are special interests involved as they are wherever government is involved but the system, as it is today, isn't designed or always run to be "evil" even Ron Paul understands that much
SO even the central-bankers understand that whenever they buy something with newly created money, be it T-bills, silver or whatever, they are essentially taking it for free so it is in essence a "loan" from the people & that's why it's recorded as a liability to the "community" (remember, the banks' reserves essentially belong to depositors, that is, to the people as a whole)

[rpwi]

All banks' reserves are held with Fed as reserves, for reserve-requirement calculations as well as for check-clearance, interbank transfers & such; it's a liability because it doesn't belong to Fed

Neither does the moon. Doesn't mean it should be held as a liability.

And since the seller of silver isn't going to give it for free, he'll need to be paid into his bank account, which will be one of the banks directly or indirectly located under "All banks' reserves"

He is paid in dollars. Distinct entities of exchange in and of themselves. They are not a source of finance. Liabilities are a source of finance. Dollars can still be easily recorded and tracked (just like aircraft from and to an airport) without having to appear as a source of finance on the balance sheet.

SO even the central-bankers understand that whenever they buy something with newly created money, be it T-bills, silver or whatever, they are essentially taking it for free so it is in essence a "loan" from the people

Taking for free is not a loan. If a thief steals an item...is that item on loan to him? If I discover a pot of gold...is that on loan to me? Taking for free is profit...not a loan.

& that's why it's recorded as a liability to the "community" (remember, the banks' reserves essentially belong to depositors, that is, to the people as a whole)

Well only on a fractional basis which is an entirely different mess.

Riddle me this. What happens if the government decides to default on all t-bills owed to the Fed. How would you account for this using accrual accounting?

[Paul Or Nothing II]

Look, you just don't understand the fundamentals of central-banking

Central-banks are "supposed to" manage money-supply (whether they should or not is a different question) & they accomplish this by buying & selling things, when they buy something, they inject new money into the economy & when they sell their assets, they withdraw/destroy money from the economy; therefore by the very nature of things, the assets they buy must go on Assets side & the money they create must go on the Liabilities side & I've also cited reasons why it does, that's how their accounting HAS TO BE in order to reflect their position

From some of your previous posts in many other threads, I thought you were looking for an honest & objective view on things but I guess you buy too much into conspiracy theories & therefore you're unable to look at the issue objectively, as is the case with most people on this forum & elsewhere & because of which, Ron Paul & the whole movement loses a lot of credibility; but anyways, so as things stand, I don't see the point in carrying on, if someone were objective enough they'd have gotten their answers by now with respect to why central-banks account the way they do

P S It's not realistic for Treasury to default on its Treasuries with the Fed because Fed is owned by the government, it receives Fed's profits so the government also stands to bear Fed's losses so they'll have to cover the losses & that's why wiping out Fed-held debt isn't that easy; such a "default" would be pointless in essence because it's the money that government owes to itself, the only thing it will accomplish is to probably throw the markets & the economy into a turmoil

[Travlyr]

Fed is owned by the government

Prove that.

[Travlyr]

Dollars in possession are equity assets if they are real. Dollars are liabilities if they are not real. Liable to get one landed in jail for counterfeiting.

Look, you just don't understand the fundamentals of central-banking

Central banks fundamental reason to exist is to counterfeit money. That is what elastic money means. It is to control the people through governments. Rulers. That's the fundamental reason for debasement of currency (inflation). They tell us that.

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the 'hidden' confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights." - Alan Greenspan, Gold and Economic Freedom

Central-banks are "supposed to" manage money-supply

Central banks are supposed to control the money supply thereby controlling where the money is spent. First they spend it on friends in high places (the Queen), then spend it on good ole boys who play with toys (military and police), then spend it on good hardworking CEOs (politicians and corporate lobbyists). Finally, they spend some on media minions and 'educators/indoctrinators." As the money trickles on down, they give just enough to the working class (slaves) to keep them from revolting. If a few of them starve or die from exposure... that is just collateral damage.

(whether they should or not is a different question) & they accomplish this by buying & selling things, when they buy something, they inject new money into the economy & when they sell their assets, they withdraw/destroy money from the economy; therefore by the very nature of things, the assets they buy must go on Assets side & the money they create must go on the Liabilities side & I've also cited reasons why it does, that's how their accounting HAS TO BE in order to reflect their position

It is all obfuscation.

From some of your previous posts in many other threads, I thought you were looking for an honest & objective view on things but I guess you buy too much into conspiracy theories

Conspiracy FACT: Self-proclaimed German born international banker Paul Warburg moved to America in 1902. By 1914 the chief counterfeiter was in charge of America's money supply. He became the richest man in the world on a scant Fed salary. They even wrote a cartoon about him ... "Daddy Warbucks." The conspiracy is not a theory. It is a fact. They themselves admitted to the conspiracy.

"The matter of a uniform discount rate was discussed and settled at Jekyll Island." -- Paul M. Warburg

Minneapolis Fed - Paul Warburg's Crusade to Establish a Central Bank in the United States

& therefore you're unable to look at the issue objectively, as is the case with most people on this forum & elsewhere & because of which, Ron Paul & the whole movement loses a lot of credibility;

Perhaps an audit of the Fed would help with the credibility issue.

but anyways, so as things stand, I don't see the point in carrying on, if someone were objective enough they'd have gotten their answers by now with respect to why central-banks account the way they do

We know what they are for and how they work. That is why we demand an audit and then an END to the FED.

P S It's not realistic for Treasury to default on its Treasuries with the Fed because Fed is owned by the government,

Not true at all. That is why I ask you to prove it. It is exactly the other way around. The Fed owns the government, the media, and the 'educational'/indoctrination system. The counterfeiters own the politicians. Ron Paul wrote a book, "End The Fed." He could have called it, "End the Counterfeiting Scheme." But he did not call it, "End The Government." The Fed owns the government right now through the privilege of counterfeiting. That is why government can spend $108 million on a predator drone while people starve in the streets. They do not care about the people starving in the streets or the people terrorized and killed by drones and wars. What they care about is money and power.

it receives Fed's profits so the government also stands to bear Fed's losses so they'll have to cover the losses & that's why wiping out Fed-held debt isn't that easy; such a "default" would be pointless in essence because it's the money that government owes to itself, the only thing it will accomplish is to probably throw the markets & the economy into a turmoil

Which will be liberating for the people and free markets and devastating to the counterfeiters.

Who owns the Fed? Here is one educated guess.