Fed balance sheet
Posted by WARREN MOSLER on January 28th, 2009
With the Fed balance sheet at just over $2 trillion and an average coupon of maybe 3% that means they are removing about $60 billion a year of interest income from the non government sectors.
So while I do think lower long term rates serves public purpose, I also recognize the need to cut taxes and/or increase other government spending to reverse the restrictive nature of that policy.
This applies to all Fed rate cuts that remove income from the non government sectors.
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January 28th, 2009 at 3:53 pm
BREAKING NEWS!!! WSJ ABOUT TO GO PUBLIC WITH A SCATHING PIECE ON PETER SCHIFF!
One of my sources tells me that the WSJ will publish an article–due out either later today or tomorrow–that looks at the claims made by Peter Schiff and actual account performance of his clients. According to my source and what was implied to me by the article’s author, clients of Schiff were contacted during the compilation of this piece and some of the details will amaze you.
Keep an eye out for it.
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January 28th, 2009 at 4:47 pm
I think Mr. Schiff ticked off allot of people in high places and is paying the price. He called Bernanke a liar and smoked you many times on fox, is that stuff canned? Don’t let it bother you; he looks to me like a Shapshifting Reptilian with his eyes bugging out of his head when you talk.
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January 28th, 2009 at 6:01 pm
All: Given that the Fed can print money, I’m trying hard to find something that explains why the Government needs to finance at all (sell Treasuries) and what impact issuing Government debt has on anything.
To me, it just seems to change the term structure of savings, and potentially offer a little interest income to those who hold the debt.
What would happen if the Government just stopped issuing Treasuries?
Is there a recommended “required reading” someone can point me to?
Thanks!
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jcmccutcheon Reply:
January 28th, 2009 at 6:50 pm
FFR goes to zero unless they pay interest on reserves. I wish they would do this because it would disprove the notion that china/japan/korea is funding the US Gov.
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January 28th, 2009 at 7:08 pm
jcmccutcheon: I’m sure you’re right, but I do not understand your answer at all!
The FFR is the rate the Fed pays to banks overnight when the banks lend the Fed their reserves. I’m guessing this is how the Fed gives the banks the reserves they need to meet FRB reserve requirements.
How does this connect to the Treasury issuing a 30 year bond?
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January 28th, 2009 at 7:40 pm
Yes, the Treasury should do away with Treasury sales altogether and come just pay interest on reserves. That would finally put an end to the belief that the gov’t is borrowing.
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January 28th, 2009 at 9:20 pm
Hi Zanon, check out the ‘mandatory readings’ on this website to get more details on all of this.
and yes, set the ff rate at zero, don’t issue tsy secs, and let the fed concentrate on bank regulation. and get the fiscal balance right to restore output and employment
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January 28th, 2009 at 11:33 pm
“How does this connect to the Treasury issuing a 30 year bond?”
It connects in that the bond sales drain reserves that would otherwise drive the FF rate to zero. (And actually, you are a bit wrong about the FF – it is the rate at which banks charge each other for overnight loans (administered by the Fed through open market operations). Loans direct from the Fed are made at the discount rate. Misunderstandings about the mechanics of money have led the Fed to discourage discount window lending, thinking that somehow interbank lending is “better” – even though it’s all Fed money anyway.)
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warren mosler Reply:
January 29th, 2009 at 9:10 am
how about saying it something like this:
treasury securities offer alternative financial assets to fed member bank reserve balances
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January 29th, 2009 at 2:22 am
WARREN: Love the mandatory readings, i keep rereading them and intend to reread them some more, but there are 12 of them, and they’re all big! Just looking for which one talks about why the Govt issues treasuries at all.
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paul Reply:
January 30th, 2009 at 4:03 am
Zanon
I can’t recommend Prof. Wray’s book “Understanding Modern Money” enough. All the ground in it will be familiar with readers of this blog. However, it is fleshed out in greater detail than can be covered on a blog and very well written. By no means am I an economic literate, but, I found the book to be easy to read and understand. Personally, I would recommend it as the starting text and then progress on to Mr Mosler’s writings and comments on the blog. I’ve found that path to be easier way to enlightenment..
http://www.amazon.com/Understanding-Modern-Money-Employment-Stability/dp/1845429419/ref=sr_1_1?ie=UTF8&s=books&qid=1233301659&sr=1-1
Regards
Paul
Regards
Paul
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warren mosler Reply:
January 30th, 2009 at 7:00 am
good to hear that- we spent two years working on it!
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Scott Fullwiler Reply:
January 30th, 2009 at 11:11 am
Zanon: There’s also Stephanie Bell’s (now Kelton) paper, “Can Taxes and Bonds Finance Govt Spending.” The original wp version is at levy.org. It’s very good and very easy to follow on the role of Tsy’s and the Tsy’s account in reserve accounting. It came out a bit before Randy’s book (she, Randy, and Mat were together at Levy at the time). It’s required reading for my undergrads every year and they seem to be able to follow it.
paul Reply:
January 30th, 2009 at 7:36 pm
It’s a good work Mr Mosler, it’s clear from reading the book that a lot of thought went into the construction of the narrative. In addition, Mike Norman’s show is another excellent resource for those interested in learning the basics in a different format. Both Mike and his broadcaster deserve congratulations for presenting an excellent show.
Regards
Paul
RichW Reply:
February 2nd, 2009 at 7:33 pm
Just ordered my copy from Amazon. Looking forward to filling in the missing holes.
Would be nice if we had a general “education” topic here too. Or maybe an education topic of the week.
Agree on Mike Norman’s show too. Never miss it.
January 29th, 2009 at 9:12 am
start with soft currency economics, it had just about everything in it in a compact form.
full employment and price stability expands a policy option introduced by sce
0 is the natural rate of interest outlines a policy option
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January 29th, 2009 at 9:30 am
Warren,
Hey, isn’t that a HUGE profit “for the taxpayers!” ;)
Where are the genius media commentators, lawmakers and economists now? They don’t realize that this HUGE Fed profit (a.k.a “taxpayers making money) actually represents a net drain on the public’s income!
Brilliant post, Warren, but so sad in its irony!
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January 29th, 2009 at 10:49 am
yes, and getting worse by the day, as we squander our (path dependent) potential
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RSG Reply:
January 29th, 2009 at 1:46 pm
How can you conclude it is a net drain on non-government sector? Isn’t their a benefit in terms of borrowing costs? At best one could conclude it’s a wash.
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RichW Reply:
January 29th, 2009 at 3:08 pm
I don’t think it’s a wash when loan demand is down as far as it is (ie cars, houses).
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warren mosler Reply:
January 29th, 2009 at 3:37 pm
for every $ borrowed there’s a $ saved, plus the tsy secs held out side of gov.
so the non govt sectors are net savers overall.
also, if the fed is getting 65 billion, someone is forgoing it!
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January 29th, 2009 at 2:30 pm
RSG –
If one private sector entity pays another private sector entity, it’s a wash, regardless of the interest rate. If a private sector entity pays the Fed, the money is drained from the system, never to return. $60B in payments to the Fed is the same as rasing taxes by $60B – it reducses private savings by exactly that much.
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RSG Reply:
January 29th, 2009 at 2:53 pm
Of course. Thanks
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January 30th, 2009 at 9:54 pm
thanks all for the tips!
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