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.
To John James
What if the fed buys 1 trillion dollars worth of government debt, then rates spike and they have to turn around and sell the debt, but they only receive 700 billion dollar for their debt. What happens?
unit4: 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.
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.
Does the Fed ever have all of its money paid back and it just stops lending? My point is that with a dynamic analysis you'll see that the money is continually pumped into the economy even though loans are being paid back. It creates a steady inflation.
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I understand. It is simply a lot of growing loans.
unit4:What if the fed buys 1 trillion dollars worth of government debt, then rates spike and they have to turn around and sell the debt, but they only receive 700 billion dollar for their debt. What happens?
Again I'm not completely clear what you're saying. What do you mean by "rates spike"...and what do you mean "they have to turn around and sell the debt"? Why does the Fed have to do anything?
If foreign countries decide to ditch the dollar, rates will rise(unless the fed goes on QE 4, 5, 6...). If the portfolio of bonds that the fed has on its books gets cut by 1/3rd they couldn't sell to combate the inflation because the bonds they bought for 110, they would have to sell for 70.
So...basically you're asking what happens if people lose confidence in little pieces of paper that aren't backed by anything (which therefore means, the confidence is the only thing propping them up), and the whole system comes crashing down. I think the answer is in the question my friend.
No I am asking what does the fed do. Is it correct that it can't sell their bonds at a loss like that? I know the whole system will come crashing down eventually. I am just wondering how the fed COULD act, not necessarly how it WILL act.
I'm trying to see what you're getting at, but I must be missing something. Your first sentence and your last sentence seem to contradict each other. And why are you under the impression the Fed "can't" sell bonds for less than they bought them?
Imagine other countries stop buying our bonds and start to selling our bonds. Rates will move up very fast. A bond that the fed purchased at 110 might now be selling for 70. To combate the inflation from all the overseas dollars coming on shore, would the fed take the loss and sell its bonds at 70? What happens to the liability they had on their balance sheet? When they create a dollar, they have a liability to "pay it back".
The Fed has a liability to whom? It has to "pay back" the dollar it created, to whom? I don't understand what you're thinking. If I lend you a dollar, what liability do I have? What do I have to "pay back"? And to whom?
Liabilities of the Fed One of the interesting things about the Fed's liabilities is that some of your assets, like the green dollar bills in your pocket, get reflected as the liabilities of the Fed. Apart from this, the money lying in the reserve account of member banks and U.S. depository institutions also forms a part of the Feds' liabilities. As long as the dollar bills are lying with the Fed, they would be treated neither as assets nor as liabilities of the Fed. The dollar bills become the Fed liabilities only when the Fed puts them in circulation by purchasing assets. The size of different components of the Fed liabilities keeps on changing. For instance, if the member banks wish to convert the money lying in their reserve accounts into hard cash, the value of currency in circulation would increase and the credit balance in reserve accounts would decrease. But overall, the size of the Fed's liabilities increases or decreases whenever the Fed buys or sells its assets.
http://www.investopedia.com/articles/economics/10/understanding-the-fed-balance-sheet.asp
I'm trying to get you to understand the difference between the Fed balance sheet and a normal one (while at the same time trying to fully grasp how you're thinking it works and what you're asking).
Maybe you're forgetting the "equity" part of the balance sheet?
You're asking what happens to the liabilities if the value of the assets goes down...but you have to remember this is not normal accounting, and the Fed is not a normal operation. You already stated how the liabilities of the Fed just consist of the fiat money it prints...so what exactly does it "owe"?
Maybe this will help:
"Can the Fed Become Insolvent? "
And it sounded like you may have read this one earlier in the thread, but just to be sure:
"The Fed as Giant Counterfeiter"