Re:Joint Statement by the Department of the Treasury, Federa...
by peyton on Sunday March 12, 2023 @08:09PM
(#35128607)
> The bank now has $100, and the customer has $0.
This is wrong.
Edit: I see. I think you’re missing the full accounting picture. When somebody moves $100 of petty cash into a bank, they don’t have $0. They have $100 of cash. The bank has an asset and a liability. Rinse and repeat with the bank and Fed transactions. There’s not an $80 treasury note anywhere because those aren’t MTM.
Re:Joint Statement by the Department of the Treasury, Federa...
by kypro on Sunday March 12, 2023 @08:27PM
(#35128830)
It's a simplification, but I agree, it's not fully accurate.
I'm guessing what you're getting at here is that bank would technically have a $100 liability with the customer and $100 in cash on its balance sheet.
The point I was trying to make is that there's just $100 of spending power in this hypothetical economy.
Customer deposits this $100 at a bank.
The bank now has $100, and the customer has $0.
The bank uses the $100 to purchase a treasury bill.
The treasury bill falls in value and is now worth $80 on the open market.
The Fed says, it's cool, just pretend it's worth $100 because it will look bad otherwise.
Customer says, I want my $100 back.
The bank is now forced to sell the treasury bill and admit that it's actually worth $80.
Fed says, it's cool, just give us your $80 treasury and we'll print $100 and give it to you.
There now exist, a $80 treasury (held by the Fed) and $100 in cash which is given to the customer.
Where is this $180 of value coming from?
----
Its inflationary in two ways.
Firstly, money in the economy is created via debt, and Fed in this case is creating a debt which increases money supply. Secondly, the Fed is exchanging the bank's assets at an above market price and taking the loss onto its balance sheet.