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If the FED is a USA government institution and new money was created by that institution: why the money doesn't add to the national debt and doesn't change its

If the FED is a USA government institution and new money was created by that institution: why the money doesn't add to the national debt and doesn't change its cost?

deleted 8y ago
[deleted]
JumpCrisscross 8y ago
> If the FED is a USA government institution and new money was created by that institution The Federal Reserve is a quasi public-private institution. It has a separate balance sheet from the U.S. government. Central bank liabilities are money--a dollar bill is a Federal Reserve Note and a dollar in a bank's reserve account is wirable cash. National debt is debt accrued by politicians to pay for goods and services. Adding the money supply to the national debt would produce a meaningless number, so we don't do it.
- RobertoG 8y ago
  >>"Adding the money supply to the national debt would produce a meaningless number, so we don't do it." If the money created by the FED is just a meaningless number , why don't they finance the government directly and the USA would avoid to pay bond interests?
  - JumpCrisscross 8y ago
    > If the money created by the FED is just a meaningless number Money supply is not a meaningless number. The sum of money supply and the national debt is a meaningless number. It would be like taking my checking account balance and adding it to the amount of cash JPMorgan Chase has on its balance sheet. Independently, they're meaningful figures. And one is related to the other. But the sum doesn't do anything useful. > why don't they finance the government directly and the USA would avoid to pay bond interests? This is called running the printing presses. Wherever it has been tried, historically, rampant inflation follows. The independence of the Fed is to ensure rate-making (and money supply) decisions, which have broader economic implications than the U.S. government's interest costs, are made apolitically. (That said, the Federal Reserve is the largest buyer of U.S. Treasuries and remits its profits to the Treasury.)
    - RobertoG 8y ago
      >>"This is called running the printing presses. Wherever it has been tried, historically, rampant inflation follows." My understanding is that most of the cases of hyperinflation (Germany Weimar Republic, Zimbabwe..) were due to problems in the real economy, not to the printing of new money. Anyway, it seems that, related to inflation, the important thing is the money that is spend in the economy in the current period, not the public debt (the money that has already been spent). A big public debt doesn't mean inflation, as the case of Japan (or the USA) show. Public debt an inflation are two very uncorrelated variables.
  - cconroy 8y ago
    @JumpCrisscross how independent are they really? The fact that they will not entertain a thorough audit is in itself instructive. Perhaps central banking is too "centralized" and susceptible to corruption even in a well-run system like the Fed (the fact that the dollar is the reserve currency and they fight inflation ruthlessly too the detriment of employment). Perhaps a p2p software system could help ;)
    - JumpCrisscross 8y ago
      > they will not entertain a thorough audit The Fed is audited by the GAO, the OIG, outside auditors, and its Board [1]. Its balance sheet is published weekly and closely scrutinized by the investing public as well as every bank. > they fight inflation ruthlessly too the detriment of employment The Fed has a dual mandate. Its post-crisis journey has been one of trying to stoke inflation. [1] https://www.federalreserve.gov/faqs/about_12784.htm https://www.federalreserve.gov/faqs/about_12784.htm
      - dragonwriter 8y ago
        > Its post-crisis journey has been one of trying to stoke inflation. Well, “avoid deflation” would probably be more strictly accurate.
        AnimalMuppet 8y ago
        The problem is that they're a gnat's whisker away from deflation. They want to stoke (some) inflation to give them a bit more maneuvering room.
      - cconroy 8y ago
        You're right when I used the word I was referring to "Audit the Fed" slogan à la Bernie Sanders & Ron Paul. The bill in question that was striked down is here [0]. The bill's purpose > ...If enacted, the bill would also have ensured that the > audit results would be available to Congress. The audit > would include the Fed's "discount window", its funding > facilities, its open market operations, and its agreements with foreign bankers. [1] [0] https://en.wikipedia.org/wiki/Federal_Reserve_Transparency_Act https://en.wikipedia.org/wiki/Federal_Reserve_Transparency_A... [1] https://en.wikipedia.org/wiki/Federal_Reserve_Transparency_Act#Purpose https://en.wikipedia.org/wiki/Federal_Reserve_Transparency_A...
- salawat 8y ago
  Wait, then what is the debt measured in? I get the difference between "money" and value, but if you magic money into existence, you've caused inflation of your currency, increasing the amount of currency it would take to add up to the pre-magic "value" of your national debt number as measured in dollars. Therefore increasing it by definition. Just saying it's meaningless sounds a bit disingenuous unless I'm missing something. I smell a rat.
  - pram 8y ago
    Private banks also create money, not just the Federal Reserve. Look up fractional reserve banking. The system is implicitly inflationary.
    - salawat 8y ago
      That doesn't really detract from my point though, and there seem to be some critics of fractional reserve banking that seem to home in on the exact point I'm calling out. Every time a currency "inflates" any values measured in that currency by definition change. Or is that what's meant by it's meaningless, since the value is now basically what it was plus the fraction by which the money supply just grew? I.e. V=value final v=initial value F=fraction of money supply ex nihilo'd V=v+(v(1÷(F))) Edit: I think I got that right...
  - pembrook 8y ago
    It's counterintuitive, but inflation is a good thing. It incentivizes people to invest their money into the economy in businesses and government projects (bonds) instead of hoarding away their money in a bank account. Unfortunately how our economy works is a highly complex topic, so for most people the gut reaction is "hrmmm, that doesn't make sense at first glance to me, so it must be wrong." Thankfully, average Joe American doesn't even know the Federal Reserve exists, so the FED is able to operate with a level of sanity found no where else in government. The fact is, the FED is one of the only institutions we have that actually works because it is largely managed by subject-matter academics and not politicians, most of whom are lawyers/pastors/TV stars and war heroes...a group generally dificient in their understanding of modern economic theory. Do central banks make mistakes? Of course. Japan is a great example. But a quick look at history shows the world is better off with them than without.

If the FED is a USA government institution and new money was created by that institution: why the money doesn't add to the national debt and doesn't change its cost?

deleted 8y ago

[deleted]

JumpCrisscross 8y ago

> If the FED is a USA government institution and new money was created by that institution The Federal Reserve is a quasi public-private institution. It has a separate balance sheet from the U.S. government. Central bank liabilities are money--a dollar bill is a Federal Reserve Note and a dollar in a bank's reserve account is wirable cash. National debt is debt accrued by politicians to pay for goods and services. Adding the money supply to the national debt would produce a meaningless number, so we don't do it.

RobertoG 8y ago
>>"Adding the money supply to the national debt would produce a meaningless number, so we don't do it." If the money created by the FED is just a meaningless number , why don't they finance the government directly and the USA would avoid to pay bond interests?
- JumpCrisscross 8y ago
  > If the money created by the FED is just a meaningless number Money supply is not a meaningless number. The sum of money supply and the national debt is a meaningless number. It would be like taking my checking account balance and adding it to the amount of cash JPMorgan Chase has on its balance sheet. Independently, they're meaningful figures. And one is related to the other. But the sum doesn't do anything useful. > why don't they finance the government directly and the USA would avoid to pay bond interests? This is called running the printing presses. Wherever it has been tried, historically, rampant inflation follows. The independence of the Fed is to ensure rate-making (and money supply) decisions, which have broader economic implications than the U.S. government's interest costs, are made apolitically. (That said, the Federal Reserve is the largest buyer of U.S. Treasuries and remits its profits to the Treasury.)
  - RobertoG 8y ago
    >>"This is called running the printing presses. Wherever it has been tried, historically, rampant inflation follows." My understanding is that most of the cases of hyperinflation (Germany Weimar Republic, Zimbabwe..) were due to problems in the real economy, not to the printing of new money. Anyway, it seems that, related to inflation, the important thing is the money that is spend in the economy in the current period, not the public debt (the money that has already been spent). A big public debt doesn't mean inflation, as the case of Japan (or the USA) show. Public debt an inflation are two very uncorrelated variables.
- cconroy 8y ago
  @JumpCrisscross how independent are they really? The fact that they will not entertain a thorough audit is in itself instructive. Perhaps central banking is too "centralized" and susceptible to corruption even in a well-run system like the Fed (the fact that the dollar is the reserve currency and they fight inflation ruthlessly too the detriment of employment). Perhaps a p2p software system could help ;)
  - JumpCrisscross 8y ago
    > they will not entertain a thorough audit The Fed is audited by the GAO, the OIG, outside auditors, and its Board [1]. Its balance sheet is published weekly and closely scrutinized by the investing public as well as every bank. > they fight inflation ruthlessly too the detriment of employment The Fed has a dual mandate. Its post-crisis journey has been one of trying to stoke inflation. [1] https://www.federalreserve.gov/faqs/about_12784.htm https://www.federalreserve.gov/faqs/about_12784.htm
    - dragonwriter 8y ago
      > Its post-crisis journey has been one of trying to stoke inflation. Well, “avoid deflation” would probably be more strictly accurate.
      - AnimalMuppet 8y ago
        The problem is that they're a gnat's whisker away from deflation. They want to stoke (some) inflation to give them a bit more maneuvering room.
    - cconroy 8y ago
      You're right when I used the word I was referring to "Audit the Fed" slogan à la Bernie Sanders & Ron Paul. The bill in question that was striked down is here [0]. The bill's purpose > ...If enacted, the bill would also have ensured that the > audit results would be available to Congress. The audit > would include the Fed's "discount window", its funding > facilities, its open market operations, and its agreements with foreign bankers. [1] [0] https://en.wikipedia.org/wiki/Federal_Reserve_Transparency_Act https://en.wikipedia.org/wiki/Federal_Reserve_Transparency_A... [1] https://en.wikipedia.org/wiki/Federal_Reserve_Transparency_Act#Purpose https://en.wikipedia.org/wiki/Federal_Reserve_Transparency_A...
salawat 8y ago
Wait, then what is the debt measured in? I get the difference between "money" and value, but if you magic money into existence, you've caused inflation of your currency, increasing the amount of currency it would take to add up to the pre-magic "value" of your national debt number as measured in dollars. Therefore increasing it by definition. Just saying it's meaningless sounds a bit disingenuous unless I'm missing something. I smell a rat.
- pram 8y ago
  Private banks also create money, not just the Federal Reserve. Look up fractional reserve banking. The system is implicitly inflationary.
  - salawat 8y ago
    That doesn't really detract from my point though, and there seem to be some critics of fractional reserve banking that seem to home in on the exact point I'm calling out. Every time a currency "inflates" any values measured in that currency by definition change. Or is that what's meant by it's meaningless, since the value is now basically what it was plus the fraction by which the money supply just grew? I.e. V=value final v=initial value F=fraction of money supply ex nihilo'd V=v+(v(1÷(F))) Edit: I think I got that right...
- pembrook 8y ago
  It's counterintuitive, but inflation is a good thing. It incentivizes people to invest their money into the economy in businesses and government projects (bonds) instead of hoarding away their money in a bank account. Unfortunately how our economy works is a highly complex topic, so for most people the gut reaction is "hrmmm, that doesn't make sense at first glance to me, so it must be wrong." Thankfully, average Joe American doesn't even know the Federal Reserve exists, so the FED is able to operate with a level of sanity found no where else in government. The fact is, the FED is one of the only institutions we have that actually works because it is largely managed by subject-matter academics and not politicians, most of whom are lawyers/pastors/TV stars and war heroes...a group generally dificient in their understanding of modern economic theory. Do central banks make mistakes? Of course. Japan is a great example. But a quick look at history shows the world is better off with them than without.