Monday, January 5, 2009
James Hamilton Gets Us Up to Speed on the Fed Balance Sheet
Jeff Hummel passed this post along. I haven't read it carefully yet, but it looks promising, with lots of charts and not assuming the reader is an expert. And I was definitely intrigued when I saw this:
And how about the Fed's "free money" from the ballooning excess reserves? If those funds do start to end up as cash held by the public, then the Fed will need to worry again about inflation, in which case it has two options. One is to sell off some of its remaining assets (or fail to roll over some loans). In this case, the consequences for the Treasury are the same as above-- that income from the Fed's earnings is no longer coming back to the Treasury, and it's as if the $800 billion in excess reserves was again replaced by direct Treasury borrowing.
The second option is just allow the inflation.
The bottom line is that Bernanke has made a gamble with something approaching 2 trillion. If the gamble wins, taxpayers owe nothing. If the gamble loses, taxpayers are committed to borrow a sum equal to any losses and start making interest payments on it.
Comments:
The article on Mises today was great. It needs wide distribution. The SEC having sat on this for 8 years is amazing.
Jim O'Connor
Jim O'Connor
The essential point we must always make is this (taken from Econbrowser):
"And how did your bank come to have those deposits with the Fed? These deposits are something the Fed has the power TO CREATE OUT OF THIN AIR. This indeed is its primary power-- the ability to create money [out of thin air!!!]"
Those getting the new money are allowed, in essence, to steal the purchasing power of everyone else. This is fraud, this is theft. This is immoral and this is criminal. This is counterfeiting. At the time of the founding fathers, counterfeiting was punishable by death.
I suppose people can quibble about all of the other Austrian insights regarding the secondary effects of fiat money creation, but there can be no quibbling about this initial point. I propose using the word money "dilution" (in lieu of “depreciation” or even “inflation”) to help the public understand this. Explain that “inflation” is merely the result of money “dilution”. If the public ever came to understand this relatively simple idea, how could the Fed continue?
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"And how did your bank come to have those deposits with the Fed? These deposits are something the Fed has the power TO CREATE OUT OF THIN AIR. This indeed is its primary power-- the ability to create money [out of thin air!!!]"
Those getting the new money are allowed, in essence, to steal the purchasing power of everyone else. This is fraud, this is theft. This is immoral and this is criminal. This is counterfeiting. At the time of the founding fathers, counterfeiting was punishable by death.
I suppose people can quibble about all of the other Austrian insights regarding the secondary effects of fiat money creation, but there can be no quibbling about this initial point. I propose using the word money "dilution" (in lieu of “depreciation” or even “inflation”) to help the public understand this. Explain that “inflation” is merely the result of money “dilution”. If the public ever came to understand this relatively simple idea, how could the Fed continue?
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