Seems like one thing that isn't mentioned much about the refed raising rates, is that their 2 trillion+ bond portfolio would plumet in value. If they sold their assets back to the banks at less than they purchased them for, the excess money would be floating around the economy. Am I right to say the treasury would have to take that loss? Would the fed simply have to sit on all the bonds and let them mature if they couldn't sell them for what they purchased them for? Thanks.
I'm not exactly sure what you're asking. The Fed doesn't lose money. It prints money. So in essence, anything it "loses" is really shouldered by the public. Hence the term "socializing the losses".
The fed still has assets and liabilities. It must be paid in full for the credit it gives out. It doesn't just print money for nothing in return.
unit4:The fed still has assets and liabilities. It must be paid in full for the credit it gives out. It doesn't just print money for nothing in return.
Again, it comes down to your definitions. This time, of "nothing".
If the fed prints up 1 trillion, it must repay that 1 trillion to itself. So if it prints up 1 trillion to buy bonds, it must use the income from the bonds, either from the interest and/or procedes from the sale, to pay its liability.
by nothing i mean, it doesn't just buy bonds at any price and sell it at any price. It must remain "profitable". As far as I can remember the fed has never lost money and has always turned over profit to the treasury.
unit4: If the fed prints up 1 trillion, it must repay that 1 trillion to itself. So if it prints up 1 trillion to buy bonds, it must use the income from the bonds, either from the interest and/or procedes from the sale, to pay its liability.
No, it doesn't. It just monetizes the debt. Besides, do you understand how the Federal Funds rate works? Do you understand how the Fed lends to banks?
Then why has the dollar lost so much of its value since the creation of the Fed?
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Clayton -
unit4: If the fed prints up 1 trillion, it must repay that 1 trillion to itself. So if it prints up 1 trillion to buy bonds, it must use the income from the bonds, either from the interest and/or procedes from the sale, to pay its liability. by nothing i mean, it doesn't just buy bonds at any price and sell it at any price. It must remain "profitable". As far as I can remember the fed has never lost money and has always turned over profit to the treasury.
Whoa. If you can't already tell from the responses that have already been posted, you have a very distorted view of how the banking system and the Fed works, to say the least. I'm not sure where your information comes from, but I recommend looking into some better sources.
"Modern Money Mechanics" is probably the most authoritative source, but if you need something a little more understandable, The Creature from Jekyll Island & The Mystery of Banking ...are really the best place to start. (you can find links, including one to a free PDF download there) Other resources are below. Please look into them.
Federal Reserve System at Mises Wiki (check "links" section for more resources)
Articles: "Is Our Money Based on Debt?" "The Fed as Giant Counterfeiter" "Do Non-Banks Create Money?" "The Mystery of Central Banking"
Who Owns the Fed?
The Money Matrix series
Books: What Has Government Done to Our Money? The Mystery of Banking The Creature from Jekyll Island The Case Against the Fed
The Case for a 100 Percent Gold Dollar, & The Case for a Genuine Gold Dollar
Playlists: Money & Banking Money and How it Works
Videos: A Second Look at the Federal Reserve (YouTube) The Creature from Jekyll Island (lecture from G. Edward Griffin) Fiat Empire – Why the Federal Reserve Violates the Constitution Money, Banking and the Federal Reserve (HQ) (download here)
Tony Fernandez: Then why has the dollar lost so much of its value since the creation of the Fed?
I do not know a certain answer, but I assume it is because credit is constantly being expanded. If you are so sure the fed can "lose" money, aka print X amount of dollars, only to get less than X in return, once the fed balance sheet returns to previous levels, please show me. I have never heard of this happening. The fed always has a profit and always gives 93% of that profit to the treasury.
Roughly, what part do you think I am missing.
Maybe in the long run the Fed has made money by lending to the treasury. However, this is not the only function of the Fed. It also lends to banks via its discount window. The interest that it charges has nothing to do with risk and everything to do with the inflation rate that the Fed desires. So in the long run I'm sure that this has been a net loser for the Fed.
Besides, what do you think the Fed does when it gets the money back that it leant out? I'll give you a hint, it's not just destryed as if the printed money was only supposed to circulate temporarily.
How could the discount window be a net loser to the fed? Are you telling me banks get loans from the fed they simply do not repay?
I always thought the fed sold whatever paper it was holding to suck money back in.
unit4: How could the discount window be a net loser to the fed? Are you telling me banks get loans from the fed they simply do not repay? I always thought the fed sold whatever paper it was holding to suck money back in.
You're taking a far too static analysis of this. Look at it dynamically. Sure, banks pay back, but the Fed still has that interest rate. So while money may be coming out, money is also going out, and the money going out exceeds what is coming back in. This is how the value of the dollar has decreased over time. The Fed has always set interest rates too low such that inflation would prevail over deflation.
What do you mean "but the fed still has that interest rate"? The banks simply repay the loans with interest and that interest is sent on to the treasury. When the bank gives out money it gets debt from whoever is taking the money. Unless that bank defaults, the debt is repaid with interest.
@unit4: Please read "The Fed as Giant Counterfeiter" which John James above recommended.
Ah, thanks Clayton and John. I didn't see that. That was a very good link. I guess it comes down to the fact that the government gets to have a growing interest free loan from the fed. And while the inflation from this credit should revert to deflation as the treasury pays off its debts, it never will because the treasury will never pay its debts.