Should the Fed record dollars as equity or as liabilities?

[Jive Dadson]

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.

 

[Danke]

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.

 

[rpwi]

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.

 

[Revolution9]

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

 

[heavenlyboy34]

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".

 

[Jive Dadson]

[...] 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.

 

[Paul Or Nothing II]

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"?

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

 

[rpwi]

...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?

 

[rpwi]

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.

 

[Domalais]

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.

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.

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.

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.

 

[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/aboutthefed/fedpoint/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/aboutthefed/fedpoint/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/articles/the-value-of-seigniorage-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/articles/the-value-of-seigniorage-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.