[EMAIL PROTECTED] wrote: > In reply to thomas malloy's message of Fri, 28 Nov 2008 17:19:59 -0600 (CST): > Hi, > [snip] >> R C Macaulay wrote: >> >>> Robin , >>> At the risk of falsely claiming fraud, As any Columbian drug cartel >>> can explain, round bailing US money and storing >>> >>> Could someone explain to me how the Federal Reserve Banks get "Federal >>> securities" to "pledge", in the first place, and also what happens >>> (financially) >>> when old worn notes are taken out of circulation, and who does that. >>> >> Dah, they print them up. Congress gives it's approval, of course. > > I assume you are saying that "they" "print up" the securities, which are > effectively IOUs? > > What I'm really trying to get at is the exact flow of wealth between the > Federal > Reserve banks and the government of the USA. Do the "books" balance, or is > this > a net "one way" flow?
In short, the books must balance. Note well: It's *NOT* the Federal Reserve Board which is printing the notes. It's the Treasury. And the Treasury is run like a business: Money comes in, money goes out, and nothing is spontaneously generated. Shortfalls must be made up by borrowing, which is done by issuing bonds (or T-bills or some other simple variant on the same thing). These are normally sold to brokers at auction, and the brokers then turn around and sell them to their retail customers -- or something like that. If I recall correctly it's ordinary banks which are "tasked" with replacing old bank notes with new ones; they send the old ones back to Treasury where they are (supposed to be) destroyed. This is also a zero-sum operation ($1 old -> $1 new) but I can't tell you anything about the security of the operation, nor the details of how they assure that the old notes are really destroyed rather than being siphoned off to some needy cause in Colombia. In economics class, I once asked about "lost" money, dollar bills burned up in fires or run through the washer and no longer usable. As far as I could tell from the blurry answer I got, the amount of "destroyed" currency is so small compared to the rate of money supply growth in general that it's simply not an issue. The whole system is grossly out of equilibrium (the money supply grows continuously) and probably couldn't function "in equilibrium" anyway, which is the only time it would really matter that some funds are simply vanishing each year due to destroyed currency. Unlike all other federal agencies, the Federal Reserve Board is *not* constrained to running a zero-sum operation. They can actually create money. They must keep careful track of how much money they create, but none the less the only constraint on them, as far as I know, is their good sense (and the threat that if they step out of line Congress and the President can always fire them). They're not politicians, so they have more "good sense" than is usual for the White House and Congress, which is why the system works as well as it does (as always, contrast with Zimbabwe where the president has direct control of the money supply -- that approach doesn't typically work as well). As I recall, when the Fed has a burning desire to create more money, they do it by purchasing government securities. In other words, the Treasury "borrows" money, as usual, by selling bonds, but in this case they sell the bonds to the Fed, and the Fed uses "magic money" to buy the bonds. The magic money never existed before the bonds were purchased, which is what makes it magic. If I recall correctly this is typically done through the "open market desk" and is referred to as an "open market transaction". As I said, they need to keep track of these purchases, and in fact someplace in the back pages of the Wall Street Journal you can (or could, before Fox bought it) find a tally of how much government debt is "owned" by the Fed.
