Should the Fed record dollars as equity or as liabilities?

[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
[B]TOTAL = 3 trillion[/B]                                         [B]TOTAL = 2.5 trillion[/B]

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
[B]TOTAL = 3 trillion[/B]                                         [B]TOTAL = 2.5 trillion[/B]

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/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

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.