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Source link: http://archive.mises.org/4509/a-conundrum-or-plain-old-monetization/

A “conundrum”, or plain old monetization?

January 3, 2006 by

Fed Res outright debt holdings + Fed Repos + Foreign CB Custody accts = Total (blns)

End Dec 04 ……. $717.8 ……. $33.0 ……. $1340.3 = ……. $2091.1

End Dec 05 ……. $744.2 ……. $45.3 ……. $1522.0 = ……. $2311.5

Difference ………………………………………………………… $220.4

Outstanding Marketable debt issued by UST

Dec 04 ……………………………………………………….. $3943.6

Dec 05 (est) …………………………………………………. $4164.0

Difference ………………………………………………….. c. $220.4

QED

{ 8 comments }

DennisSperduto January 3, 2006 at 9:06 am

My understanding of Fed operations is that the aggregates presented by Mr. Corrigan in his first table are all fairly well under the Fed’s control, and as such reflect its actions. These aggregates have increased by double-digit, rates. Despite the rhetoric regarding the supposed “conundrum”, as Mr. Corrigan notes the Fed’s policy has been one of “plain old monetization.”

Yancey Ward January 3, 2006 at 12:20 pm

Dennis,

The first two items in the first table are in the FED’s complete control, but I don’t see the last one (Foreign CB assets) as being in the FED’s control.

Dennis Sperduto January 3, 2006 at 2:23 pm

Yancey,

You may be correct. My premise, and again I may be wrong, is that for the Fed to own an asset of a foreign central bank it would have had to purchase that asset.

Or is it the case that foreign central banks voluntarily open up accounts and deposit their assets at the Fed?

Yancey Ward January 3, 2006 at 2:45 pm

Dennis,

I guess I don’t know for sure. I always thought custody accounts were those that the FED held, but were owned by the foreign central banks.

Dennis Sperduto January 3, 2006 at 3:17 pm

Yancey,

Maybe someone else can straighten this out for us; it would be nice to have a correct understanding of the issue. If your understanding is correct, then the magnitude of foreign CB custody accounts held by the Fed may not be a good gauge of the degree of the Fed’s inflationary bias, since this stat is not strongly under the Fed’s control.

Still, Fed “outright debt holdings + Fed Repos”, show a 5.2% increase during 2005, which is certaintly not indicative (in any reasonable sense of the term) of “tight” monetary policy by the Fed. I think were in full agreement regarding this conclusion.

Joe Calhoun January 3, 2006 at 4:34 pm

Gentlemen,

It seems irrelevant to me whether the Fed has “control” of those accounts. The debt has been monetized.

Dennis Sperduto January 3, 2006 at 6:54 pm

Yes, the key issue is whether the Fed has monetized debt. But the accounting/balance sheet manifestation of the Fed’s monetization of treasury debt is the treasury debt on the Fed’s balance sheet.

Although, I certainly do not speak for Mr. Corrigan, I believe the point of his posting was to differentiate between the Fed’s policies as illustrated through its concrete actions, and its fallacious and misleading rhetoric. As Mr. Corrigan asked: “A ‘conundrum’, or plain old monetization?”

corrigan January 4, 2006 at 2:42 am

You are correct when you say the custody accounts are the US assets held – of their own volition – by foreign central banks at the NY Fed (where they represent the bulk, though not the totality of such assets)and, as such, these are not DIRECTLY the responsibilty of Mr Greenspan, et al.

However, a moment’s reflection will show that this accumulation is nonetheless the agent of monetization, albeit of the indirect, foreign kind.

Moreover, here we see the pernicious workings of Jacques Rueff’s ‘childish game of marbles’ wherein the foreign CBs are preventing the specie-flow mechanism from exerting its automatic braking influence on US credit creation (which would have greatly limited the build up of the USA’s inordinate debt and external deficits)- by means of their absorption of their citizens’ excess US dollar receipts and their price-insentive intervention to return them to the US system.

Thus, the names on some of the tickets might be a little difficult to pronounce, but the US government is getting its overspending underwritten by means of the printing press, all the same.

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