wabuffo

In addition to all the worries about too much stimulus spending stoking inflation, I think there are some interesting things happening in Fed and US Treasury policy over the next four and a half months that one should really keep an eye on. Warning – this is a technical discussion that goes a bit deep in the weeds of the US monetary system. The 99% of you who don’t care about this stuff should STOP READING NOW. Ok – here are the basic moving parts: 1) The Federal Reserve is net-buying roughly $100b in US Treasury securities per month and will keep doing that to continue its “accommodative policy”. 2) The US Treasury’s debt ceiling was suspended on August 1, 2019 as part of a budget agreement by Congress. That debt ceiling toggles back into effect on August 1, 2021. As part of that budget agreement, the balance in the US Treasury’s General Account at the Fed is supposed to snap back to the level it was on the day in 2019 when the ceiling was lifted. This rule was to prevent the US Treasury from “running up its balance”. That TGA to-be balance is $117.6b. Current balance is ~$1.3t https://fsapps.fiscal.treasury.gov/dts/files/19080100.pdf 3) As part of its response to the pandemic, the Federal Reserve on April 1, 2020 temporarily excluded US Treasury securities and bank’s deposits at the Fed (reserves) from its calculation of the SLR (Supplementary Leverage Ratio). The SLR is a measure of bank capital adequacy. Given that reserves currently make up $3.6t and US Treasury holdings make up another $1t vs total bank assets of $21t, excluding these assets from SLR calculations is a pretty big deal for the banks. The SLR exemption for reserves and Treasury securities is set to expire at the end of this month. If it did, bank balance sheets could get squeezed due to the change in their regulatory capital ratios. Most likely, the big banks would sell all of their US Treasury holdings ($1t) to compensate for the over $1t increase in reserves (which they can't get rid of). Its possibly (and even likely in the case of the SLR exemption) that many of these “rules” and policies could change. But if they don’t, it sets up for some interesting interactions that could affect liquidity and risk in the US monetary system. I will assume 1) and 2) are likely not going to change and 3) will get extended. Total US Treasury debt outstanding in the private sector’s hands is $21.816t as at March 10, 2021 (per the US Treasury Daily Statement): https://fsapps.fiscal.treasury.gov/dts/files/21031000.pdf Since the Federal Reserve can’t buy its Treasury securities directly from the US Treasury (except in certain emergency circumstances in the past), it must buy them from the private sector thereby reducing the amount available (and suppressing supply and yields, in theory). On March 10, 2021, the Federal Reserve owned $4.891t in Treasury securities per its H.4.1 report: https://www.federalreserve.gov/releases/h41/current/ Thus, the amount of Treasury securities circulating in the private sector’s hands is $16.925t. This becomes important because the US Treasury appears to be starting the process of running down its account balance at the Fed. Here is the daily numbers for March so far. Normally, the US Treasury would run with a very small balance. This balance used to be $5b before the GFC and then grew to over $100b - $400b after the GFC. But it stands at $1.5t near the beginning of March. The US Treasury would fund its $125b in deficit spending from this table with more-or-less $125b of net public debt issuance and keep its TGA balance level at some much lower amount. But that’s not happening now. Because it is trying to lower its TGA balance, not only did it carry out $125b in deficit spending but it ALSO REDEEMED a net $106b in Treasury debt. Keep in mind, that while this was happening the Federal Reserve was also out in the market buying probably $25b in Treasury debt. Thus, US Treasury debt in private sector hands shrank by $131b. Ok - so we don't know what will happen, but what we do know is that the US Treasury must further reduce its account balance at the Fed by $1.15t between now and the end of July. ($1.268t - 0.118t). How much deficit spending will the US Treasury undertake over that time frame. There is a new stimulus bill passed and some of that spending is happening right now (stimulus checks) - but there's a lot of spending in this bill that will happen over time (past the Aug 1st, 2021 date). In addition, we are coming up to March, April and June which are big tax receipt months for the US Treasury. April in particular is usually a big surplus month (and I think tax receipts will be surprisingly large this year - think all those people with 2020 capital gains taxes to pay that were not withheld or paid as estimated taxes). So let's say $600b of deficit spending over this period - and therefore $550b of net further US Treasury debt reduction (redemptions > issuance). Now add the Fed purchases of $100b per month = $450b and we have a potential reduction of $1t in US Treasury debt outstanding based on these assumptions. That is a ($1t/$16.9t) = 6% reduction a 4.5 month period = 15% annualized run rate. I think that could be a big deal in such a short time - especially with the economy growing fast (~6% GDP growth rate) over this same time frame. A growing economy needs more US Treasury securities, not less. Could this cause a bit of a traffic accident in US monetary policy? It's hard to see yields going higher in this kind of reduction. Of course, many things could change. The Fed could stop its buying and co-ordinate with the US Treasury as it is undertaking its TGA reduction. I would actually recommend this strategy. Or the Fed could decide to not renew SLR - which cause the big banks to dump their US Treasuries into the market. (though I actually don't know if this helps since the banks' holdings are part of the total holdings of the US private sector). Other things to think about. What happens to the banks if their reserves grow to over $5t because of the TGA's reduction? To be fair, most of this reserve growth will be accompanied by deposit growth from the US Treasury deficit spending (except for you Wells Fargo! No asset growth for you!). I'm not making any predictions - but if I did, I'd say Treasury yields go lower and the short-end even goes negative, maybe. Gold continues to go lower til April and then starts back up. Stocks roar higher through May or early June. After that comes the great whipsaw. Yields turn suddenly higher, the air fills with talk of tax increases and the back half of the year is a bit of a rough go for stocks. Of course, this forecast is worth what you are paying for it -- because of course I could be wrong. And regardless, macro shouldn't matter for stock pickers like us anyway 8) wabuffo

As far as QE and reserves are concerned, I don’t think any of this matters really. What matters however is spending and that spending is going up financed by federal deficits. At some point we will see the limits of what can be done without penalties, but it does not seem we are there yet. I agree - just because it turns out we have much more fiscal capacity than we previously thought, doesn't mean we might not push the monetary engine past its red-line. The thing that worries me is that all the MMTers say "don't worry - the deficits will be reigned in if we see inflation". First, I think inflation builds very slowly but breaks out very suddenly such that by the time the Fed and the US Treasury react, it will be too late. Second, the MMT response to inflation seems to be "if inflation, then raise taxes on the rich". That's why you are starting to see discussions about very high tax rates and even wealth taxes. This is almost the opposite of "supply-side economics" of the 1980s where marginal tax rate cuts grow the economy but spread the wealth unevenly. MMTers want to tax at high rates and even tax wealth in order to send stimulus checks directly to everyone below a certain income in order to stimulate the economy. They are very excited about what they saw in 2020. Taxing at high marginal rates and taxing wealth is the way to turn inflation into hyperinflation, IMHO. They don't call it the misery index for nothing. wabuffo

I'd argue the reserve status is already threatened. You already have large countries like China trading in yuan/rubles with Russia to buy oil/gas. At some point it is inevitable that China‘s Yuan becomes a reserve currency. I think this is almost an impossibility - not quite, but almost. That's because of three important factors that must be in place to replace not just the US dollar but also the US rules-based global trading system that the USD supports. Its not just about setting up a tiny oil market in one corner of the world that doesn't use the USD in its trades. First, for the rest of the world to use and save a portion of its wealth in your new reserve currency, your country must run an extremely large trade deficit with every large country. No country other than the US wants to do that - not China, not Japan, not Russia (too small an economy anyway), not Euro-land. They all want to be net exporters - not net importers. Second, you must have the pre-eminent military to peacefully (or not) enforce the global trading system. China doesn't even have a blue water navy, just a coastal defense force. Only the US (and Japan's SDF) have true deep water navies. The US maintains the world's ocean-ways free from harassment so that every country does not have to worry about its ability to trade around the world and get whatever resources it needs. Who can even replace the US doing this? Who even wants to bear the cost of this? Finally, there's geography. Which country enjoys both the greatest protection and the greatest benefit from where it is situated geographically? Which ones are the most weakened by their geography. I think that answer is pretty obvious. Sure, countries gripe and complain about the US "hegemony" especially when they don't like the US throwing its weight around enforcing its system, but let's face it they have all benefited - Germany, France, Japan, even China have all gained the most -- but also have the most to lose from a decline in the US global rules-based system, if it were to happen. And that's because none of them could replace it. Its not perfect, but I would hate to see what a world without the US dollar as a reserve currency would look like. wabuffo

Wabuffo, your take on today's reserve currency status vs historical pegging to gold is interesting. Quite a bit to chew on. The post is gone? sorry about that - I was worried that I was going down a rabbit hole so I took it down to rework it. I'm reposting it below. how can we be so sure there will be no inflation of significance? We can never be sure. One thing I wanted to point out though is that prior to 1971, the US Federal government was in effect spending and borrowing in a "foreign currency". Of course, foreign currency here means gold since the US dollar was pegged to a fixed gold price. One cause of inflation is when a sovereign borrower can no longer borrow in a foreign currency at the old peg and must default and devalue its sovereign currency at a new, lower, peg value. When the default/devaluation happens, inflation is the result as buyers/sellers and borrowers/creditors readjust and reset terms of trade of their contracts over time. Your reference to the 1930s/1940s and 1970s both reflect this - in 1933, the US, under Roosevelt, reset the gold price to $35/oz from $20.67/oz and in 1971 Nixon ended altogether the US dollar's fix to the gold price. There was follow-on inflation in both periods for over a decade after the devaluation/default. There have also been other periods in the US history where the peg was temporarily suspended and then re-established (eg Civil War). By pegging US currency/obligations to gold, US monetary policy pre-1971, was like that of Hong Kong or Greece or even Illinois since none of these governments control their own currency. Since 1971, we are slowly finding out, through trial and error, that the fiscal capacity of the United States is much larger than anyone ever thought since we are a sovereign issuer of our currency (which also happens to be the reserve currency). So I think comparisons are difficult between today and pre-1971. I would even say they are difficult pre-GFC and post-GFC because of vastly different Fed monetary regimes in place since the GFC. wabuffo

However, banks can still use the portion of increased money supply that is held up in reserves to enable transactions valued at higher prices, right? Reserves haven't been a factor in lending for a century or so. Its bank regulatory capital (and the profitability of the loans) that is the constraint. Mandatory reserve requirements were temporarily suspended as a response to the pandemic - so they literally are no longer a constraint. we don't need to worry about inflation because "reserves circulate in the Federal Reserve accounts but never leave the Federal Reserve"? I wouldn't agree with such a direct correlation between inflation and reserves. What I would say is that we are learning, through trial and error, that the fiscal capacity of the federal government spending as a sovereign currency issuer without causing inflation is much larger than anyone previously thought. wabuffo

With the current ttm earnings yield of the S&P at 2.5%, any spike in rates would have large implications. Now imagine if they also raise the Federal corporate tax rate, too..... 8) wabuffo

we've moved on to Roaring 20s headlines in the Economist, Bloomberg Businessweek and Money Week. Predictions of a lasting global boom driven by post-pandemic animal spirts, re-building better, productivity gains from cloud etc., supportive fiscal and monetary policy, and so on. All of which could result in a multi year bull market. How plausible is this prediction given we struggled to get much above 3% GDP growth pre-pandemic The roaring 20s (like the roaring 1980s) were driven by very large cuts to top US marginal tax rates. I bet none of those big name business/economics magazines mention that. The top US Federal income tax rate fell from 77% at the start of the 20s down to 25% by 1925. Coolidge is a very underrated US President. (Reagan took it from 70% in 1980 down to 28% by 1986). Since no one is talking about tax cuts and, in fact, a number of tax increases are being proposed by the new Administration, I don't think these 20s will be quite so roaring. wabuffo

Unsurprisingly, the Survey of Consumer Finances shows that the median household is well behind the mean in terms of financial assets and net worth. What point are we arguing? I think this argument is confusing household balance sheets vs household income statements. You and thepupil are talking wealth, I'm talking annual income. I'm not disagreeing that some households may have negative net worth. Where I am disagreeing is that even negative net worth households have a mismatch of floating vs fixed rates on their income statement -- floating on their meagre interest-earning assets and fixed on their vast interest-paying consumer and mortgage debts. Thus, even a household with negative net worth will see a drop in annual income when rates drop. And that's what drives consumption. wabuffo

Which Fed survey are you referring to? KJP - this one: https://www.federalreserve.gov/releases/z1/20201210/z1.pdf cop a squint at p. 144. I'm attaching it here [click for full-size viewing] can you elaborate here? thepupil - sure! I've highlighted in yellow the relevant balance sheet items for US households in aggregate from the Z-1 table I ripped out of the Fed's report above. Most Americans biggest source of wealth is their home equity. In addition, they have $12 trillion in short-term rate sensitive instruments like time deposit/savings accounts and money-market funds. But their liabilities are largely unaffected by rate changes. Most mortgages are fixed-rate so they won't change if rates change. Consumer credit is largely credit cards and car loans which some, if not most, is fixed rate as well. Let's swag that approx $4 trillion of the total household debts are variable rate. Thus, households have about $8 trillion of NET exposure to short-term rates, so a 1% increase in rates adds about $80 billion to annual income. But if rates drop 1%, then savers save more to recover that lost $80 billion of income. Are there individual households that are underwater? Sure. But its the aggregate numbers that move national consumption and that, in turn, moves GDP, IMHO. wabuffo

So if the interest rates are low and the fed is providing a ton of liquidity shouldn't the "growth" stocks continue the same way they've been on over the past decade? stahleyp -- I guess I didn't really answer this specific question directly. I don't invest in a macro way - but if I did, the two macro variables I would try to forecast are: corporate tax rates (and to a lesser degree personal capital gains tax rates) and long-term Treasury yields. This makes sense right? A dollar of pre-tax income has an annuity value of (1-tax rate)/risk-free rate. Since mid-2017, early 2018 we got a lower corporate tax rate and generally low long-term Tsy yields. That's been good for stocks. For now that should continue to the fall of 2021. After that? I think we could see a double-whammy of a higher corporate tax rate (21% going to, say, 28-29% and possibly higher personal investment taxes) and long-term yields rising on the 10- and 30-year long bonds. That will flip what was a strong tailwind for stocks into a medium-strength headwind in 2022 and beyond. Not a disaster but not the recipe for 15-20% returns in the stock market. Of course, who really knows. I think its best to ignore this stuff and just deal with the micro of analyzing the specifics of the individual stocks in front of you. wabuffo

why is deflation treated like kryptonite? JRM - I think you have to distinguish between price declines due to productivity growth/innovation (which are good for the economy as living standards rise) and price declines strictly due to the value of the dollar increasing (ie - dollar becomes "scarcer"). In the latter case, consumer/business debts become more onerous (increase in real terms) and can lead to a debt/deflation spiral and liquidation of the economy. In the recent past you said you were buying value stocks (I'm assuming you meant something like like low p/b, low p/e or whatever - but my assumptions could be wrong!). So if the interest rates are low and the fed is providing a ton of liquidity shouldn't the "growth" stocks continue the same way they've been on over the past decade? stahleyp - I don't let macro infect my stock selection. I just like riffing on the stuff. I don't do as well when the equity indices are flying. I like to think I do better in down markets, but unfortunately down markets are becoming rare. And when they happen, they last a week now before the monetary authorities bring out their bazookas. Isn't the individual US consumer/voter also often massively short the dollar via a highly levered 30-year fixed-rate mortgage and, perhaps, other debt such as school loans? And how easy is it to reduce nominal wages alongside deflation? KJP - quite the opposite. The Fed household wealth survey proves that most households are hurt by low interest rates rather than benefiting from them. I've been saying for awhile now that the Fed's interest rate suppression punishes savers more than it helps debtors. Because of this, savers save more and consume less which is the opposite goal of what the Fed is trying to do. And its easy to reduce nominal wages alongside deflation in aggregate - just create massive layoffs and unemployment. wabuffo

Today we are printing money and the treasury is sending checks out within the $1.9T stimulus package which is 9.1% of GDP. We have some slack in the economy to absorb some stimulus , but not 9.1% our economy. So, I think we will see inflation, but it likely will be a short term spike. Spek - I basically agree with your thesis. People always focus on the spending but a reduction in the deficit is really a three-legged stool. First, spending will almost certainly go down after this year (though I am afraid that politicians have discovered a new toy -- sending stimulus checks to constituents). Second, the economy will also grow pretty rapidly this year -- maybe 5-6% for the full year. And finally, tax revenues always collapse in a downturn (especially a severe one like 2020 where 20% of the population lost their employment income). So one could see the actual spending fall 40%, tax revenues boom (think of all those capital gains taxes that have to be paid plus growing employment income) and a couple years of rapid GDP growth and we could be back to a 3-4% deficit to GDP ratio by 2022 or 2023. But a lot can happen between now and then so its never a sure thing. wabuffo

If gold moves due to inflation why did it spike from 2008-2011 and then from 2018-2020? In other words, why trust that the gold market knows what inflation will do if its been wrong in the past? I'm looking at GLD since it's the easier to measure from my view. Hey ps! Good questions! First i like to think of the USD like any other commodity. Like lumber or wheat, the USD has its own supply and demand curves. What gold does is it gives you a real-time price signal on the USD's supply and demand (like any other commodity). Gold does this because gold is very stable - its one of the most stable commodities because of its annual mining to above ground inventory ratio. Ok - so we'll come to demand in a moment. First supply. Supply of USD assets comes, not from the Fed, but from the US Treasury. As I've rambled on in a number of posts - US Treasury deficit spending creates new financial assets in the private sector banking system. Treasury debt issuance and Fed operations are asset swaps and don't create new financial assets, they just change the composition of the private sector's US governments asset mix between currency/reserves/Treasury debt. So the first answer to your question deals with US Treasury deficit spending. Here's an annual chart of US cash deficit (as measured by the US Treasury monthly statements) vs annual US GDP. In my mind, any time the deficit goes over 4% of GDP - its probably creating too much USD's. I've highlighted the years where it was above 4%. Right off the bat - the data matches your observations (almost). 2008-2012 and then 2018-2019 were years of "overproduction" of USDs and gold being sensitive to supply - noticed it. 2020 of course has also been a year of oversupply (especially during the April-August period). Since then, its moderated a bit but I haven't updated my numbers fore the last few months. I should do that soon. Back to USD demand. I think the big difference now vs the 1970s, is that there is a lot more wealth than there was back then. So demand for dollars today is less about groceries and gasoline. It is more about wealth and assets. The dollars today chase real estate, stocks, etc... So that's where the overproduction of USD goes and gold once again is sensitive to it. What is happening right now? Its hard to say - but if I had to guess.... Demand for USD and USD assets is revving up. Supply of USDs is moderating. If you look at tax receipts, they are picking up and I think March, April and June will be big months with surprisingly large Fed tax receipts. We'll see how this stimulus package shakes out in terms of spending. The result is that gold is falling which signals a fast recovery in 2021 for the US economy. A fast growing economy signals very high demand for USDs. That suppresses gold if the supply of dollars does not keep up. What about Treasury yields? I think that's noise right now. There are a lot of monetary plumbing things happening over the next 4-5 months that could create a lot of noise in Treasury yields. We'll see. Because of some of things that may or may not happen (SLR regs getting extended, Congressional debt limit kicking back in on Aug 1st, etc) - its really hard to make a prediction. But if I had to guess, SLR will get extended but the US Treasury will have to suppress its net bond issuance so as to hit its account balance requirement before Aug. 1st. That would put pressure on Treasury yields and cause them to go lower - especially if the Fed is still buying $100b of Tsys per month. I'm not sure if I answered your question. But the bottom line is its less about product price inflation these days and more about asset price inflation because that's where all the money goes. wabuffo

Interesting. I sold out at $6.9 or so. BBG reporting that the COH and EC reached a deal today. BK exit can now move forward pretty quickly. wabuffo

More GTXMQ.... wabuffo

I personally don't know a lot about Booth. I listened to an interview with her a while ago though. From what I remember she seemed like a gold bug stahleyp - that was my impression too that she was a gold bug/Austrian type. who understands the plumbing the best. Surprisingly, very few do. Monetary policy is talked about by so many people, yet I find so few truly understand the mechanics of it. Someone I learned a lot from is George Selgin. He's a Fed watcher and economist who has written many books on the subject of the Fed. He's also pretty active on twitter so you can give him a follow there. https://www.amazon.com/s?k=george+selgin&i=stripbooks&crid=322T05JTCR395&sprefix=George+Selgin%2Caps%2C173&ref=nb_sb_ss_c_2_13_ts-doa-p "Floored" is a good one. wabuffo

So would something like UBI not cause inflation? I have no opinion on it. I'm generally a libertarian and think the less govt the better - but I don't know that another spending program makes a difference. Why would tax increases cause inflation? Would it just take reduce market valuations and have minimal effects on the real economy? Taxes create a wedge against the real economy. Also higher tax rates encourage evasion (both legal and illegal). The only thing that gives the sovereign currency its value is one needs it to extinguish one's Federal tax obligations. That's why we accept the govt's money. If you weaken tax collection, you start to weaken the currency, IMHO. Low taxes, sound money - its that simple. Empires crumble not because they overspend, but because they overtax and collection falls apart followed by the empire. Good book on the subject that I recommend: https://www.amazon.com/Good-Evil-Impact-Course-Civilization/dp/1568332351/ref=sr_1_1?crid=2REHOBTDPUVDW&dchild=1&keywords=for+good+and+evil&qid=1614655409&sprefix=For+good+and+ev%2Caps%2C186&sr=8-1 Do you have any thoughts on Danelle Dimartino Booth? I haven't really followed her stuff. Should I? What do you think of her economic commentary? wabuffo

Spek - I think there are two factors in my macro thinking (which is worth what you are paying for it -- nothing). 1) The US recovery will be very strong throughout 2021 - remember we are feeling the effects of stimulus plus the low personal and corporate tax regime of the Trump administration (for now until the Biden folks dismantle it) 2) the US monetary authorities have messed up and now have a Treasury account that must hit its 2019 account balance by August 1st of this year when debt ceiling suspension is removed per Congress's 2019 bill (debt ceiling was suspended for two years on Aug 1st, 2019). I'm not sure if that is the July 31st, 2019 amount ($176b) or the August 1st, 2019 amount ($118b) - but the current balance is $1.4t. With the Fed still on auto-pilot buying Treasuries - it will create two problems for the US economy: a) bank reserves will surge to over $5b (vs $21b of total US banking sector assets). Yes the Fed will relax some regulatory measures (ie not counting reserves as part of regulatory leverage/capital ratios) - but it still moves the US banking system closer to Japanese style zombie banks. b) the combination of Fed buying and Treasury spending its TGA without much Treasury bond issuance might actually shrink the supply of o/s Treasury debt. That's actually a bad thing - especially for a rapidly growing US economy that we will see over the next six months. While none of this should affect our stock-picking, I think it will be an interesting monetary experiment to watch in real-time. Cool stuff. wabuffo

On another note, what would be the biggest risk of inflation in your view? 1) defaulting on sovereign debt issued in another currency (oh wait, the US govt has none) 2) massive tax increases (eg, 70% marginal tax rates, wealth taxes, etc) 3) failed political system The reality is that this last stimulus package is probably unnecessary since the economy appears to be in full recovery mode. But its not permanent spending - just a lot of one-timers sprinkled here and there. That'll juice things a bit - but the deficit will roll over back to a more normal % to GDP ratio (especially as the denominator recovers). Hopefully, that'll be it. I think Japan-ification style monetary repression due to the Fed and US Treasury messing things up is the bigger risk here and I've talked about it upthread. I think its even possible we see slight negative yields in the short end of the Treasury curve by May-June. wabuffo

In short - they both (Burry, Alden) don't know what they are talking about. Alden, in particular is constantly misinterpreting the data and in 2019 thought Fed liquidity was inflating the stock market (now she says the Fed's reserves go nowhere, LOL) Gold and Treasury bond yields are heading down. I've explained why in other posts as well as this thread. The dollar will strengthen. There is no inflation - people always assume that a strengthening economy will cause inflation - and it never does. wabuffo

I view the buybacks to be more a testament on the directionality of the economy, and less so on BRK itself being cheap. If I had to guess, I think Buffett (and Munger) realize that the odds of bagging that $100B "elephant" in their remaining lifetimes has probably dropped to zero. That opinion may have been informed by the reaction of the Fed and US Treasury to the financial panic caused last March by the pandemic shutdowns. That crisis lasted about 5 minutes before any company who needed emergency capital suddenly could borrow cheaply and in almost unlimited supply. Buffett's opportunity to deploy large sums during panics has been taken away. I think its no coincidence that the buybacks started coming in size in Q3, Q4 of last year and according to Buffett will continue in 2021. wabuffo

Looks like 4Q buyback was more aggressive them people thought! Not only that but Buffett kept buying in 2021. Through Feb 16, 2021, it looks like he repurchased another $4-$4.5b in BRK stock (depending on prices paid). Very impressive. wabuffo

thank wabuffo, we are on the same page that the Fed is more than just a Recorder. I had added more functions beyond Recording with the analogy This short paper might help - its a good overview of modern central bank operations. It was written before the Fed significantly expanded its balance sheet but the principles still hold. I think you will find it informative even if you just scan the ten principles only. https://core.ac.uk/download/pdf/207650683.pdf wabuffo

...the Federal Reserve is like a Recorder's office where money is locked up and all that can happen is money can move around but you can't take money out of the Federal Reserve. part of this statement is ok, but a lot of it is incorrect. The Federal Reserve is a bank -- the US Treasury's bank. The US Treasury 'owns' the equity of the Federal Reserve. It exists to manage payments between banks and other banks and also between banks and the US Treasury. The Fed has a simple mission -- make sure every payment in the United States financial system clears without failure. To do this the banks and the US Treasury have "checking accounts" at the Fed. Yes - these are electronic deposits and its an electronic ledger. The amount that banks must keep in these accounts is determined by Fed policy (ie, the Fed used to allow 'daylight' overdrafts so banks used to keep very little at the Fed; now they are not allowed so banks must keep more on deposit) -- just like a private sector bank account. Lately (well for over a decade now) -- the Fed has also given itself another mission: buy Treasury assets and credit the banks' "checking accounts" when it purchases them. Finally, you and I don't get accounts at the Fed. Only banks do. But if the US Treasury needs to send us a stimulus direct deposit - it manages the payment by asking the Fed to move electronic deposits to our bank which means our banks' reserve account. This creates the deposit for us (and a reserve balance for our bank). - so reserves circulate in the Federal Reserve accounts but never leave the Federal Reserve. - the Fed through its policies and its purchases controls the total amount of reserves in the system (in aggregate banks do not control this). The Fed does this because it believes it is lowering long-term interest rates. - US Treasury spending, taxing and issuance of debt also moves reserves between the banks and the US Treasury's general account. There may be a few other things I may have forgotten - but that's the gist of it. The Fed is more than a "recorder" -- it is a bank. A special bank set up by the US Federal Government but a bank nonetheless. wabuffo

They will invent all kinds of complex arguments around money being locked up in the Federal Reserve, even though all Federal Reserve is doing is recording the transactions. This is similar to saying all real estate is locked up inside the County Recorder's office and no real estate can leave the county recorder's office. All you can do is move real estate around within the County Recorder's office, but that doesn't prevent it from being recorded at higher and higher valuations. wabuffo