2012 performance

[hoost]

Federal reserve notes are only a liability when they are created.

The real question is: where does the first federal reserve note come from?

It's not a difficult question. Every Fed liability has a corresponding asset. Federal Reserve Notes are generally backed by Treasuries. Federal Reserve Notes would not exist without the debt. That's why we say that our money supply is "debt-based".

The Treasury's liabilities are the private sector's assets. The Fed just converts those assets into our money supply.

If it's not a difficult question then why won't you answer it?

I believe I offered the definition of inflation as an increase in the money supply.  If I did not, I apologize for the confusion.  Therefore when you say that something is inflationary or deflationary, we need to look at what happens to the money supply with a given input to determine whether or not this is the case.

No. You just invented a definition of inflation. That's not what inflation is. The real definition of inflation is...

"In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time"
Source: http://en.wikipedia.org/wiki/Inflation

I wish I was intelligent enough to have invented the definition of inflation.

From your wikipedia article:

The Austrian School asserts that inflation is an increase in the money supply, rising prices are merely consequences and this semantic difference is important in defining inflation.[46] Austrians stress that inflation affects prices in various degree, i.e. that prices rise more sharply in some sectors than in other sectors of the economy. The reason for the disparity is that excess money will be concentrated to certain sectors, such as housing, stocks or health care. Because of this disparity, Austrians argue that the aggregate price level can be very misleading when observing the effects of inflation. Austrian economists measure inflation by calculating the growth of new units of money that are available for immediate use in exchange, that have been created over time.[47][48][49]

I would argue that this is a better definition than the one you have chosen (even though I didn't actually invent it myself) because, as is pointed out in the above paragraph, a rising money supply causes price increases in various assets, but not necessarily all prices at once.  By using this definition, you are identifying the cause, and not the effect.

I would also refer you to the following article for a more hashed out argument for this definition:

http://mises.org/daily/908

Perhaps a more precise nomenclature would be "monetary inflation":

Monetary inflation is a sustained increase in the money supply of a country. It usually results in price inflation, which is a rise in the general level of prices of goods and services . Originally the term "inflation" was used to refer only to monetary inflation, whereas in present usage it usually refers to price inflation.[1] Members of the Austrian School of economics make no such distinction, maintaining that monetary inflation is inflation.[2]

http://en.wikipedia.org/wiki/Monetary_inflation

You can't just assume that inflation is a pure function of the money supply. It doesn't work that way. There are many, many factors that cause inflation or deflation.

If I define inflation as an increase in the money supply, then that's what it is.  In any case, we can say that monetary inflation is caused by an increase in the money supply.

That leaves us with your definition, which is perhaps better described as price inflation.

As you say, price inflation is a rise in the general level of prices of goods and services.

What, other than increases in the money supply, causes the GENERAL LEVEL of prices of goods and services to increase?

You might say that demand causes the increase.  Where does this demand come from?  Where do people get the money to bid up the price of virtually everything?

[MediumTex]

What, other than increases in the money supply, causes the GENERAL LEVEL of prices of goods and services to increase?

An oil price shock could cause the general level of prices to increase without any change in the money supply, since the price of oil filters through the economy into the price of almost everything.

You might say that demand causes the increase.  Where does this demand come from?  Where do people get the money to bid up the price of virtually everything?

In the short run, people can draw down their savings to maintain the same level of overall demand during a period of rising prices, though you are correct that such a period can't go on forever.  At some point people will simply run out of money to pay higher prices for everything, and the prices of some things will start falling as people are forced to stop buying because they just don't have any more money.

[Gumby]

Federal reserve notes are only a liability when they are created.

The real question is: where does the first federal reserve note come from?

It's not a difficult question. Every Fed liability has a corresponding asset. Federal Reserve Notes are generally backed by Treasuries. Federal Reserve Notes would not exist without the debt. That's why we say that our money supply is "debt-based".

The Treasury's liabilities are the private sector's assets. The Fed just converts those assets into our money supply.

If it's not a difficult question then why won't you answer it?

??

I just did. Federal debt is the main asset that backs our currency. So, under normal operations, the first Federal Reserve Note was (likely) created when the Fed purchased a Treasury Bond from a Primary Dealer. Remember, the Fed cannot purchase Treasuries directly from the Treasury — it must go through Primary Dealers, who represent the private sector. If the Primary Dealer didn't have any money to purchase that Treasury Bond, the Fed would give them an overnight loan or repo to buy the bond — the loan would then be repaid when government spending (by the Treasury) increased the Primary Dealer's reserves enough to pay back the loan.

In any case, Federal Reserve Notes are supposed to be backed by our Federal Debt.

If I define inflation as an increase in the money supply, then that's what it is.  In any case, we can say that monetary inflation is caused by an increase in the money supply.

If you say so. But, there are no economists today who believe that the money supply by itself can predict inflation. If it were true, the 1990s would have resulted in high inflation — when the money supply increased very rapidly. And, of course, Japan shows us that increasing the money supply does not cause inflation.

Even our dear mentor, Harry Browne — an Austrian, no less — explained inflation on his investment radio show (recorded on 12/12/04):

Harry Browne: Inflation results from the supply of money increasing faster than the demand for money. Now, mostly what we hear though is that inflation results from the increase supply of money. In other words, an increase in the supply of money is "A" and inflation is "B". When you get "A" then "B" follows. But what happens is periods like the past few years when the money supply has been increasing at a fairly rapid rate, and yet, we do not see any appreciable price inflation whatsoever. So, what we're seeing here is that the money supply has increased, but the consequence has not ensued. And that's because of two things. One of which is timing, and the other is that other factors can be introduced. So, what we do mean to say, really, is that an increase in the supply of money makes the inflation rate greater than it would be without that increase in the supply of money. We also take into account the demand for money — the desire of individuals to hold money in their pocket, to hang on to money, rather than spending, saving, or investing it. And if that is increasing as fast as the supply of money, then there is no increase in the inflation rate. So, all other things being equal, the increase in the supply of money leads to an increase in the price inflation rate. But, there are other things that have to be considered and that case, mostly the demand for money. These other factors always play a part, but we can't always see them.

Source: https://web.archive.org/web/20160324133 ... -12-12.mp3 (skip to 13:20)

That leaves us with your definition, which is perhaps better described as price inflation.

My definition? I think you mean the definition that economists and consumers actually use. Last time I checked, the CPI — the figure everyone uses to monitor inflation — is based on prices over time.

For more information on inflation, please read the following thread...

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=7

[MachineGhost]

If I define inflation as an increase in the money supply, then that's what it is.  In any case, we can say that monetary inflation is caused by an increase in the money supply.

Inflation is caused by an excess of supply relative to a fixed demand for goods/services or an excess of demand relative to a fixed supply of good/services.  There's no special category that limits inflation to the money supply as it follows the law of supply and demand just as anything in life does.

I suspect you're trying to define inflation as Friedman's Monetarism school of thought did, that just any increase in the money supply would automatically equate to inflation.

MG

[hoost]

??

I just did. Federal debt is the main asset that backs our currency. So, under normal operations, the first Federal Reserve Note was (likely) created when the Fed purchased a Treasury Bond from a Primary Dealer. Remember, the Fed cannot purchase Treasuries directly from the Treasury — it must go through Primary Dealers, who represent the private sector. If the Primary Dealer didn't have any money to purchase that Treasury Bond, the Fed would give them an overnight loan or repo to buy the bond — the loan would then be repaid when government spending (by the Treasury) increased the Primary Dealer's reserves enough to pay back the loan.

In any case, Federal Reserve Notes are supposed to be backed by our Federal Debt.

How did a Primary Dealer purchase a Treasury Bond if there were no Federal Reserve Notes with which to purchase it?

My definition? I think you mean the definition that economists and consumers actually use.

This is my point.  We have to have a working definition of our terms in order to discuss the monetary system and how it functions.  The original point of discussion was how certain actions affect the money supply, therefore I have offered a definition of inflation that is helpful in examining this more closely.  I should have specified monetary inflation (an increase in the money supply) for clarity, as opposed to price inflation (an increase in prices). 

I have not tried to examine anything related to prices up to this point; as I've stated, I'm trying to develop a mutual understanding of the mechanics of the system.  Once we have that agreed upon, we can move into causes and effects and the impact on the greater economy.

I suspect you're trying to define inflation as Friedman's Monetarism school of thought did, that just any increase in the money supply would automatically equate to inflation.

MG

I haven't studied Friedman's Monetarism, so I'm not sure.  As stated above, I'm working on putting together a working understanding of how the monetary system functions.  I offered a definition of inflation that helped explain this.  My wording was imprecise and I should have called it monetary inflation.  There was a claim that I made up the definition from nowhere, therefore I posted several references to this understanding of inflation.  I don't think it's constructive to our understanding of the monetary system at this point to go into its effect on prices or anything else, because we can't even seem to agree on how the system works yet.

I hope you see the distinction between monetary inflation and price inflation.  Monetary inflation is an increase in the money supply.  Price inflation is an increase in prices.  I'm not proposing any tie between the two at this point.  That is a whole different discussion.

[hoost]

What, other than increases in the money supply, causes the GENERAL LEVEL of prices of goods and services to increase?

An oil price shock could cause the general level of prices to increase without any change in the money supply, since the price of oil filters through the economy into the price of almost everything.

You might say that demand causes the increase.  Where does this demand come from?  Where do people get the money to bid up the price of virtually everything?

In the short run, people can draw down their savings to maintain the same level of overall demand during a period of rising prices, though you are correct that such a period can't go on forever.  At some point people will simply run out of money to pay higher prices for everything, and the prices of some things will start falling as people are forced to stop buying because they just don't have any more money.

True.  I guess the question would be what causes the oil price to increase?  Reduced supply, increased demand, or excess money in the economy?

The oil industry is cyclical, and the cycles seem to coincide with the major recessions.

We see a lot of malinvestment in the oil industry during the boom times.  This is readily apparent right now in south Texas; operating companies are already cutting back on gas drilling because of the collapse of [natural] gas prices.  Now that I think about it, one could conclude that a recession is on the way.

We also have excess supply of oil in the U.S.  Operating companies are now exporting oil because there is excess supply in the States.

That being said, I would imagine some of the price increase in oil is due to increased world-wide demand, although I believe demand has receded some since 2008.  It might be instructive to compare the run up in oil prices to the run up in gold and other commodity prices, although as you've said, the prices of some of the commodities likely increased due to the increase in oil.  As HB would say, "we live in an uncertain world".  Who knows.

[Gumby]

How did a Primary Dealer purchase a Treasury Bond if there were no Federal Reserve Notes with which to purchase it?

Federal Reserve Notes are just the name and classification of our paper currency. They only make up a percentage of the total monetary base. Primary Dealers don't buy Treasuries with paper Federal Reserve Notes. Primary Dealers use electronic base money to purchase Treasuries. If the Primary Dealers don't have the reserves to purchase Treasuries from the Treasury, the Fed can loan Primary Dealers electronic base money (literally created out of thin air, with keystrokes, and backed by absolutely nothing) and the Primary Dealers just have to pay it back to the Fed once the Treasury's deficit spending makes its way back into Primary Dealer reserve accounts. But keep in mind that the Fed's short term loans (of electronic base many) or repos from the Fed are not a new net financial assets because those loans must be paid back to the Fed (often very quickly) and is generally swapped for other collateral.

The original point of discussion was how certain actions affect the money supply, therefore I have offered a definition of inflation that is helpful in examining this more closely.  I should have specified monetary inflation (an increase in the money supply) for clarity, as opposed to price inflation (an increase in prices).

That's all well and good, but "monetary inflation" isn't all that useful for predicting real inflation. So, I'm not sure I see the point of examining it. The monetary base has more than tripled over the past decade and we've seen low inflation. If you're trying to understand why the monetary base tripled, it's simply because the Fed made a monetary policy to purchase that many more assets (in coordination with the Treasury's fiscal deficit spending) to create that much more base money (via swaps on those generated Treasury bonds). The Fed conducts monetary policy. The Treasury conducts fiscal policy.

I haven't studied Friedman's Monetarism, so I'm not sure.  As stated above, I'm working on putting together a working understanding of how the monetary system functions.  I offered a definition of inflation that helped explain this.

Feel free to explore it, but I'm not sure you're going to make much progress with that approach. There aren't really many economists that still subscribe to Friedman's Monetarism. Monetarism died during the 1990s when it couldn't explain low inflation while the money supply was growing so rapidly. And, Monetarism can't explain Japan either. Monetarists are practically the laughing stock of economics.

Don't get me wrong... there is a casual relationship between printing money and inflation. But, you really can't use monetary inflation to predict real inflation the way Monetarists used to believe you could. So, Monetarists were largely discredited and had to rebrand their economic framework to get people to take them seriously.

[Lone Wolf]

I dunno LW.. You tell us that the Treasury is borrowing the Fed's money (we agree that happens operationally). But, then you don't seem to acknowledge that the Fed's money would not exist without the bonds that the Treasury issued.

Sure thing.  I attempted to capture the scope of our agreement on this point in my list: "The great majority of our base money was created via Fed purchases of Treasury debt.  The Fed owns other securities such as morgage-backed securities (booo!), gold, and foreign currencies but these are minority players.  (We of course set aside coins, bills, etc.)"

We agree that the ~$1.5 trillion of US debt that the Fed owns is an important part of the Fed's balance sheet (and thus our base money supply.)  We disagree as to whether US debt (especially increasing quantities of US debt) are fundamental to our supply of base money.

My first point would be that this $1.5 trillion is far less than the ~$10 trillion in marketable debt or ~$16 trillion in total debt that we've racked up.  Thus it is clear to me that there's more US debt than the Fed "needs" in order to grow its (currently enormous) balance sheet.

My second point is that there are also $900 billion in mortgage-backed securities on the Fed's balance sheet (which also contribute to our base money supply.)  This is about 60% the size of the current Treasury holdings -- a very significant fraction!

When you compare this to the 2008 Fed balance sheet (~$800 billion total), you realize that this is an enormous holding.  In fact, if the Fed chose to contract its balance sheet to 2008 levels, it could do so by holding nothing more than its current mortgage-backed securities.  This doesn't mean that our base money supply "wouldn't exist" if it weren't for mortgage-backed securities.  Rather it just means that MBS are the tools the Fed chose to swell its balance sheet in this case.

Set aside the horror of the whole MBS thing for a moment.  It clearly demonstrates that while Treasuries are a crucial tool for the Fed, our base money does not strictly flow from US debt.  US debt is merely the best POMO tool that the Fed has to do its job of interest rate and inflation targeting.

I've tried to stick with objective observations here, and then draw some logical conclusions based on those observations.  If we can't agree on HOW the system works, we can't really debate whether or not it's a good system and the implications of various policies.  Bear in mind that all of this stuff happens at once; we need to look at the aggregate to actually determine what's happening.  This thing has a lot of moving parts (by design), so unless we know what each part does, we can't see how they work together.

Hoost -- excellent analysis all the way through here.  This IMO is the way to go with any problem.  Make the objective observations first and then draw conclusions based solely on the data that you have.  I've deceived myself enough times to learn the lesson that rigor is so crucial to the correct understanding of any model or system.

[moda0306]

If the fed has to BUY things with its money printing... it's limited in its ability to issue money (hoping that taxation by the treasury & legal tender laws will create demand for the currency) beyond what it's willin to pay you back on demand.  For instance, when the fed "bought gold" with its reserve notes, the only way it could do so realistically was to promise to pay that amount of gold back.  It couldn't just spit money out and hope that it would take hold.  Things are different now.  No promise of repayment by the fed drives the value of paper money... it's taxation by the treasury that creates the collective sucking sound that will only accept those green pieces of paper.  This means that the fed has already completely morphed in its role as currency issuer once off of the gold standard... it needs a "partner" out there to give its reserve notes value.

Well once you leave a gold standard, what else do you have to buy from the market? Basically, if we're pretending for a second that the treasury is a currency user, all the fed can do is trade its base money for horizontal money created by the "non-fed" sector (including government).  But those "currency-user" assets denominated in dollars never would have come into existence without the original dollars to begin with... so are we really looking at the small amount of base money that was exchanged for gold (but is no longer convertible) as being responsible for the whole system working?  Because if you take out the gold (and foreign currencies, which I think is quite risky to think that this should be the driver of a domestic currency issuance swap), you're talking about the fed "buying" assets that don't even exist yet, because the fed can't issue currency without buying something back, and without other currencies, the only thing they could buy back is financial assets denominated in a currency that doesn't exist yet.... see the Catch 22 here?  The fed's existance is incomplete without the treasury, taxation and legal tender laws... and they behave this way, in spite of their assertion that they're "independent."

If you stopped here, even though it seems like we're stuck in a Catch 22 of money creation unless the fed buys non-dollar-denominated financial assets, the fed could maybe be considered the sole currency issuer (though I'd still argue that the rest of gov't, through taxation and legal tender laws, is a huge piece of the structure... who would sell their non-dollar-denominated money to a federal reserve issuing confetti that wasn't reinforced by taxation & legal tender laws unless their was some redeemability promise??).  However, as Gumby and I have repeatedly pointed out in several different ways, the treasury isn't just some entity that can tax and help reinforce the value of a fiat currency, it actually works hand-in-hand with the fed...

Even if NONE of those relationships between the fed & treasury were as we have observed., if the fed had one, sole job, it would be to ensure the stability of the monetary system, payments, and interest rates.  It not only sets the price of treasury debt, but sets up auctions so they're designed not to fail.  They can't fund the treasury directly, but they stage the environment so that banks will WANT to buy treasury debt at the price the fed decides.  This is literally the core of what they do.  The treasury defaulting is completely inconsistent with the fed's primary task... one that they have all the tools to prevent and have used them repeatedly.

One last thing to pick your brains about... if ALL the fed can do is trade fiat base money with other financial assets (other forms of money), can it ever truly increase the money supply?  Further, what do you guys think gives our currency value?  Taxation?  Legal tender laws?  Are these not an integral part of what truly creates "money" vs confetti?  If these are rooted in the role of the treasury and the federal government in general, shouldn't we really examine whether this entity is a currency user vs issuer?  Aren't we getting to the point where it's all but proven that they are part of the currency-issuance system, and their appearance is a currency user is just that... appearance?  I mean if any other entity had as tight a relationship with the fed, we'd be appalled, and that's after seeing a lot of backstoping for a big banks by the fed in times of crisis.  The "bail out," if you will, is literally baked into the relationship between the fed & treasury.

[moda0306]

I'll just add that I'm a bit surprised that the incredibly low rates of treasury bonds, up to the cusp of the debt ceiling debate, was all because of peoples' hope that the fed would illegally bail out the treasury, and not because the markets understood the relationship.  We constantly call treasury "risk-free" debt, and I think LW has even referred to it as substantially more free of risk than an FDIC insured account.  That's really saying something. 

Aren't we getting to the point where we should fundamentally rethink the treasury's supposed role as currency USER, and instead look at what they truly are, a partner with the fed?  Without the two operating in unison things would look much different than they do today... treasuries wouldn't be the uber-liquid risk-free instruments they're viewed as. 

[Gumby]

We agree that the ~$1.5 trillion of US debt that the Fed owns is an important part of the Fed's balance sheet (and thus our base money supply.)

Whew! And that's a good thing, because Treasury debt has the lowest credit risk of any asset on the planet.

We disagree as to whether US debt (especially increasing quantities of US debt) are fundamental to our supply of base money.

If you're going to tell us that, then you're going to have to explain how you've come to that conclusion. First of all, most people believe that the Fed purchasing MBS is walking dangerously close to — or overstepping into — fiscal policy. Yet, the Fed purchasing it's own government's debt is considered normal, and even prudent. Even Bernanke has expressed his uneasiness with the Fed purchasing MBS. So, I guess you can argue that the Fed can purchase tons of credit-based assets from Primary Dealers to increase the money supply.... but what you can't explain is how the principal and interest payments of those MBS and credit instruments are fulfilled without additional Treasury-backed base money.

See, that's where your logic breaks down. You tell us that our currency could be backed by Mortgage Backed Securities, but then you fail to realize that Mortgage Backed Securities — when held by the Fed — must be paid back in the Federal Reserve System, which requires payments made with base money, since the payments to the Fed must be a transfer of base money reserves. In other words, MBS assets are really just a promise to move base money into another bank's reserve account. So, even if the Fed owns trillions of dollars in MBS, the MBS will eventually be paid to the Fed with base money as the principal and interest is paid off.

Either the MBS promises become worthless — and the Fed just takes a loss, which is then offset with Treasury income (and any profits from Treasury income, beyond the loss, are just returned to the Treasury). The Fed wants to own Treasuries because it guarantees it will receive risk-free base money payments to balance its books. But the Fed holding MBS is just a promise from the private sector to deliver base money it doesn't necessarily have, to the Fed, over time. The Fed is way better off holding Treasuries than MBS, because when you unravel the Möbius strip of where the MBS payments to the Fed come from, you find that all the credit in the private sector is really backed by leveraged Treasury debt and paid back with base money that comes from Treasury debt. And any base money that doesn't directly come from Treasury debt still comes from Treasury debt when you look at the composition of those credit instruments and their principal payments when all of the net credit is zeroed and paid off.

In other words... all the credit in the private sector is traced back to leveraged risk-free Treasury debt and base money payments from Treasury debt. THAT'S WHY THEY CALL IT A DEBT-BASED MONETARY SYSTEM!!!!!

http://en.wikipedia.org/wiki/Debt-based_monetary_system

LW, I must have posted that link a dozen times in this thread and you've never even once responded to it. We have a debt-based monetary system — it's a fact.

If you would only address what it means to have a "debt-based monetary system" we could actually have a real discussion here — rather than dance around these silly distractions of how the Fed swaps private credit that's really just highly leveraged Treasury debt and the private sector's promises for payments of Treasury-backed base money.

My first point would be that this $1.5 trillion is far less than the ~$10 trillion in marketable debt or ~$16 trillion in total debt that we've racked up.  Thus it is clear to me that there's more US debt than the Fed "needs" in order to grow its (currently enormous) balance sheet.

Uh... yeah. If the Fed swapped out all of the private sector's Treasury securities, then there wouldn't be any risk-free savings assets for the private sector to hold. That would be very bad. The Fed doesn't do us any favor by swapping out Treasuries from the private sector. The private sector wants risk-free Treasuries rather than excess reserves.

My second point is that there are also $900 billion in mortgage-backed securities on the Fed's balance sheet (which also contribute to our base money supply.)  This is about 60% the size of the current Treasury holdings -- a very significant fraction!

And as I explained above, the MBS payments must be made with real base money, as the MBS matures. The payments are always traced back to Treasury debt-based base money when you pay of all these credit instruments with base money — which is what needs to happen when the Fed holds a private credit asset.

In fact, if the Fed chose to contract its balance sheet to 2008 levels, it could do so by holding nothing more than its current mortgage-backed securities.

In which case, the private sector would be forced to deliver base money to the Fed that it wouldn't have. There would be no base money left when the MBS payments and interest were all paid back to the Fed. The private sector would need more Treasury-based base money to replenish its base money. The Fed could swap out more private credit instruments...but all that would do is destroy more and more private credit and more and more base money over time. This is where your "the Fed could buy all our credit" logic breaks down.

This doesn't mean that our base money supply "wouldn't exist" if it weren't for mortgage-backed securities.  Rather it just means that MBS are the tools the Fed chose to swell its balance sheet in this case.

LW, as I explained above, our money supply originates from Treasury debt. If it weren't for Treasury debt, we'd have no highly liquid risk-free assets on which to base our currency or leverage our private credit. And without Treasury debt, we'd have to hand over all our assets to the government in order to create money.

See, if the Treasury is generating net deposits of Treasury securities in the private sector, then that gives us new assets to trade for base money. Anything else we trade for base money (MBS, agency debt) just results in net assets being removed from the private sector over time as the base money payments are made.

Set aside the horror of the whole MBS thing for a moment.  It clearly demonstrates that while Treasuries are a crucial tool for the Fed, our base money does not strictly flow from US debt.  US debt is merely the best POMO tool that the Fed has to do its job of interest rate and inflation targeting.

No. Treasury debt is the only new net financial asset that is constantly added to the private sector that allows the private sector to grow its risk-free financial assets on which it can leverage. When the private sector creates an asset, such as MBS, and the Fed gives the private sector base money in exchange for MBS, the private sector must deliver the swapped out base money back to the Fed over time to pay the principal and interest. The interest payments — also due as base money — actually causes the private sector to have less base money in its possession as the MBS assets mature. This is why the private sector needs more and more net Treasury deposits over time (which the Fed can then swap out for base money)... it's because the interest payments typically require new base money that does not yet exist in the private sector.

Treasuries are the only way to add net financial asset to the private sector. If you are aware of another way to add net financial assets to the private sector, please let us know.

[MarySB]

Hmmm...I've just waded through 15 pages of this thread looking for a discussion of 2012 PP performance. After all, that's what the title of this thread suggests. So, if you are not going to discuss 2012 performance, perhaps you should retitle the thread. JMHO.

[Gosso]

Hmmm...I've just waded through 15 pages of this thread looking for a discussion of 2012 PP performance. After all, that's what the title of this thread suggests. So, if you are not going to discuss 2012 performance, perhaps you should retitle the thread. JMHO.

Never judge a thread by its title. 

[MediumTex]

Hmmm...I've just waded through 15 pages of this thread looking for a discussion of 2012 PP performance. After all, that's what the title of this thread suggests. So, if you are not going to discuss 2012 performance, perhaps you should retitle the thread. JMHO.

The PP is up about 1% in 2012 YTD. 

You can go into SmartMoney and set up a simple 4 fund portfolio of equal parts SPY, GLD, SHY and TLT and it will allow you to instantly see the PP's daily, weekly, monthly, YTD and historical annual performance any time you want to check it out.

It probably takes five minutes to set up a SmartMoney portfolio.  That may be a useful tool for you.

[HB Reader]

I also think there would be a high likelihood of some Treasury officials being put in jail for contempt of Congress if they tried to use the "platinum coin" idea to fund government operations.

What gives you that idea? The law — written by Congress — says that the Treasury secretary has the power to mint a platinum coin of any denomination he chooses.

http://www.law.cornell.edu/uscode/text/31/5112#k

In fact, all coins that the Treasury secretary orders to be minted are debt-free legal tender. Are you suggesting that the Treasury Secretary should be thrown in jail for minting $500 million in quarters, which are debt-free legal tender? That doesn't make any sense.

The Treasury Secretary is perfectly in his right to mint a $50 billion coin or $50 trillion coin and deposit it in the Treasury's Fed account. Once the coin is struck it becomes legal tender. Legal tender laws require banks to accept it (that's the whole point of legal tender laws). The Fed doesn't get to reject legal tender because they don't like it. Like it or not, coins are debt-free legal tender instruments.

Congress went through a lot of trouble to write the platinum coin law the way they did. It wasn't an accident. It was purposefully put in there as an escape hatch and worded in a way that there was no restriction put on the Secretary of the Treasury. You don't have to like it, but it's law.

I strongly suspect that is also the view of the lawyers in the Treasury, Federal Reserve and on the Congressional oversight committees.  I can't imagine that being viewed in Congress as anything other than a clumsy attempt by the Executive branch to usurp Congressional control over the government's pursestrings.

You are mistaken. The law that gives the unlimited power to the Secretary of the Treasury was written by Congress.

http://www.law.cornell.edu/uscode/text/31/5112

This is not some Treasury Official's attempt to create a loophole. The law was written by Congress. It's obvious that Congress wanted an escape hatch in case they ever needed to order the Treasury Secretary to use it. I agree that this is something that will likely never be used, but please don't try to make this look like someone in the Executive branch is trying to pull a fast one on Congress. Congress wrote the platinum seignorage law and passed it!

Anyway, the Federal Register says...

“Pursuant to the United States Mint Public Enterprise Fund (PEF) statute, 31 U.S.C. 5136, all receipts from fines assessed under the regulation would be deposited in the PEF and the Secretary of the Treasury would transfer these amounts, along with regular United States Mint seigniorage and profits, to the General Fund as miscellaneous receipts. As miscellaneous receipts in the Treasury—the drawing of funds from which are subject to appropriation by Congress—neither the Secretary of the Treasury, nor the Director of the Mint could be subject to “possible temptation * * * when [their] executive responsibilities * * * may make [them] partisan to maintain the high level of contribution”? from the assessment process provided for under the regulation. Cf. Ward v. Village of Monroeville, 409 U.S. 57, 60 (1972). Moreover, the amounts involved would nonetheless render any ostensible temptation inconsequential because the relatively small amounts that the United States Mint could be expected to receive in fines payable under 31 U.S.C. 333 would be de minimis when compared to the recent amounts ($600-800 million) that the United States Mint annually has transferred to the General Fund.“
Source: https://www.federalregister.gov/article ... tates#p-46

What that means is that the Mint stated in the Federal Register that 31 USC 5136 allows the Secretary to deposit Mint seigniorage  “as miscellaneous receipts in the Treasury, the drawing of funds from which are subject to appropriation by Congress”?. It would be counted on the federal budget as revenue similar to Federal Reserve seigniorage, which is deposited as miscellaneous receipts in the Treasury, the drawing of funds from which are subject to appropriation by Congress.

In other words, the Fed doesn't get to choose what is money and what is not.

But, let's be honest. The Treasury will never resort to seignorage to pay off the national debt — even though it's clear that they could. If they did, the entire debt charade would be over.

Also, I think the fiat greenbacks issued under President Lincoln were issued under authority of the Legal Tender Acts as passed in Congress.  I don't think Lincoln did it totally on his own.  I could be wrong about that.  Certainly Congress can pass nearly any law they want, but I'm not sure that proves much one way or another.

Lincoln pressured Congress to let the Treasury issue fiat money. What it proves is that the Treasury is the institution that creates net financial assets in the private sector. The Fed does not have the authority to conduct helicopter drops or increase net financial assets in the private sector.

Gumby --

You write as if your interpretations of the law and Congressional and Executive branch motives are dispositive. They are not.  While MMT may offer some valuable macroeconomic insights on the workings of our monetary system, your discussion of the law and the “$2 Trillion platinum coin”? concept is seriously flawed.     

I am well aware that Congress wrote the laws you quoted.  I’ve also read many of the websites you have cited in the past.  We had a lengthy thread covering many of these issues last year (Re: 2Trillion over 10 years???).  Anyone who wants can go back and read it will see that I thought the idea was hokey then.  I’m more convinced now.   

First, I agree the law you quoted permits the Secretary of the Treasury to strike legal tender platinum coins in any denomination or design he wishes.  And the Treasury is entitled to any positive (or negative) seignorage that may accrue, just like any other coin, medal, or bullion item struck at the US Mint.
 
From there, however, your idea breaks down under a welter of strained interpretations and questionable assumptions and assertions.  It is simply not “law”? as you present it.

First, you state that the Federal Reserve Act gives the Treasury Secretary control over the Federal Reserve System.  Like LW, I don’t read it as giving the Secretary control over the Federal Reserve System.
 
The Federal Reserve is legally an independent agency created by the Congress in 1913.  The Treasury Department is an Executive branch agency.  Whatever merit there may be in considering them one entity for purposes of macroeconomic analysis, for purposes of the law and constitution they are definitely separate and distinct.  As someone who drafted Congressional testimony for senior Treasury officials for a number of years (as well as worked with attorneys from the Federal Reserve on numerous occasions) it is inconceivable to me that a Treasury Secretary would testify, or take the position, as you describe before Congress.

No, Gumby, I’m not suggesting the Secretary of the Treasury should be put in jail for minting $500 million in quarters.  I am saying he can’t just strike coins and deposit them in the Treasury account at the Federal Reserve and use the funds for government operations as suggested by the advocates of the $2 Trillion platinum coin.  Coins are struck at the US Mint are for circulation through the Federal Reserve System, or for direct sale to the public.  If the Secretary has authority to deposit legal tender coins in the Fed account, why doesn’t he do this with the approximately one billion of dollar coins currently held by the Federal Reserve for the Treasury because they haven’t been successful in placing them in circulation?         

Second, you state the Federal Reserve would have to accept the coin since it is legal tender – that is the point of legal tender laws.  Please explain that.  As I understand them, legal tender laws require the acceptance of lawful money in settlement of an obligation or debt.  Unless the Treasury’s Fed account is overdrawn (something the Treasury studiously avoids) there is no debt or obligation being settled.     

Third, you wrote “Congress went through a lot of trouble to write the platinum coin law the way they did.  It wasn’t an accident.  It was purposefully put in there as an escape hatch and worded in a way that there was no restriction put on the Secretary of the Treasury. You don't have to like it, but it's law.”?

You won’t be surprised that I disagree that it is law, but I’m curious on what basis you feel you can make such a confident assertion about Congressional intent?  Is it from a study of the legislative history of the law?  If so, which law?  It certainly does not square with what I have been told in my research.

Which leads to my last comment….

Why in the world would Congress deliberately pass a law that hands control of the government’s pursestrings, a basic Constitutional prerogative, to the Executive branch?  That doesn’t make any sense to me.

[Gumby]

I am saying he can’t just strike coins and deposit them in the Treasury account at the Federal Reserve and use the funds for government operations as suggested by the advocates of the $2 Trillion platinum coin.

Why not? It's legal tender. The Federal Reserve System is obligated to accept legal tender (see below). You haven't offered a legal reason why he can't. In fact, nobody has offered a legal reason why he can't.

Coins are struck at the US Mint are for circulation through the Federal Reserve System, or for direct sale to the public.  If the Secretary has authority to deposit legal tender coins in the Fed account, why doesn’t he do this with the approximately one billion of dollar coins currently held by the Federal Reserve for the Treasury because they haven’t been successful in placing them in circulation?

Well, you just answered your own question. If the Fed ordered those coins from the Treasury, then the Treasury has already pocketed the profit from the production of those coins — since it only costs the Treasury about 12¢ to produce each dollar coin. The Treasury deposits seignorage profit into the General Fund all the time:

"Seigniorage is deposited periodically to the General Fund where it reduces the government’s need to borrow."

Source: United States Mint FY 2013 President’s Budget Submission (Page 4): http://www.treasury.gov/about/budget-pe ... t%20CJ.pdf

Actually... The Treasury has already used the profit from minting dollar coins and swept it to its Treasury account.

"During 2011...the US Mint's most profitable denomination was the $1 coin, which generated $382.8 million in seigniorage."

Source: http://news.coinupdate.com/cent-nickel- ... ture-1158/

Second, you state the Federal Reserve would have to accept the coin since it is legal tender – that is the point of legal tender laws.  Please explain that.  As I understand them, legal tender laws require the acceptance of lawful money in settlement of an obligation or debt.  Unless the Treasury’s Fed account is overdrawn (something the Treasury studiously avoids) there is no debt or obligation being settled.

The Federal Reserve System is required to accept legal tender. Private businesses only have to accept legal tender for debts, but not necessarily for goods and services.

"If you have a coffee can full of pennies, there is only one place in New York City you can go that is legally obligated to redeem them: the Federal Reserve Bank."

Source: http://www.nytimes.com/1993/11/06/nyreg ... nk-so.html

Anyway, even if you don't want to believe that — even though it's absolutely true — the Fed holds lots of Treasury debt, so the Treasury is completely in its legal right to swap or pay its Treasury bond "debts" to the Fed with any of its legal tender coins.

You won’t be surprised that I disagree that it is law, but I’m curious on what basis you feel you can make such a confident assertion about Congressional intent?

Well, it is law. It was passed by Congress.

beowulf explains the Congressional intent...

The legislative history permitting platinum coinage is interesting, subsection (k) was added in 1996 in an Omnibus Appropriations bill a month before the general election (presumably just as Congress was home to campaign). The original bill [c104:H.R.2018] authorizing it DID place limitations on Secretary’s authority (namely, didn’t leave denomination to his discretion and it tied value to platinum market value). Before final passage, Congress in its wisdom, deleted those limitations. The 1996 Omnibus bill also created the Mint Public Enterprise Fund, erasing the budgetary distinction between circulating coins and collectible coins (The Secretary can now sweep the sales proceeds of either into Tsy General Fund at any time).

I don’t put much stock in legislative history myself (I’m on Team Scalia, only the words of a statute itself count), but the federal judge in Florida who struck down Obamacare as unconstitutional made a point to strike the entire law because while the bill had originally had a severability clause (boilerplate clause stating even if one section is unconstitutional, the rest of a statute is still valid), Congress deleted the clause before final passage. The court inferred that by deleting a severability clause, Congress’s clear intent was that the Obamacare bill was not severable. Likewise, by deleting any limitation on the Secretary’s platinum coin seigniorage power. Congress’s clear intent was that there are no limitations on said power. Between platinum coinage and the Mint PEF and assuming that Congress understands what its voting for (ha ha), they WANTED to put a video game-style cheat code into Title 31.
Source: http://pragcap.com/qe3-treasury-style-g ... ment-63555

The law was clearly changed to remove the limitations and give the Treasury secretary more flexibility. You can see the original bill here. The passed law can be seen here. By deleting the limitations — and adding language to clearly allow any denomination — the courts would have to infer that this meant that Congress's intent was that the Treasury Secretary's powers would not be limited.

Which leads to my last comment….

Why in the world would Congress deliberately pass a law that hands control of the government’s pursestrings, a basic Constitutional prerogative, to the Executive branch?  That doesn’t make any sense to me.

Well, the Treasury is part of the Executive branch. And it wouldn't be the first time in our nation's history that the Treasury created money out of paper or coins. But, I don't believe seignorage gives the Executive Branch the power to spend willy nilly. It's really just an easy way for the Treasury to pay its debts. What this does is allow the Executive Branch to control how money is managed or created — which is nothing new. Nixon ended gold convertibility with the flick of a pen. JFK issued silver certificates with the flick of a pen.

In any case, it happened, and it is law. I believe it was put there as an escape hatch — for emergency purposes only. During September 11th, 2001 the government had to run some very difficult plays to keep the government running — drawing funds from external Treasury accounts since bond auctions were delayed and Wall Street was closed. So, I would imagine that this is only intended as a last resort.

Keep in mind that if the Treasury Secretary were to ever use this law, the debt game would be pretty much over. People would question every aspect of the debt-based monetary system. So, I am fully confident that large-denomination seignorage will never be implemented — except for perhaps an extreme, last resort, situation.

[MediumTex]

Gumby,

As a practical matter, I am pretty sure that the platinum coin loophole was placed in the bill by a clever staffer who probably saw the opportunity that such a provision created should it ever be needed, and may not have even talked to any members of Congress about it, or may have only explained it to a few members who agreed that it sounded like a good idea.  I worked on the Hill for a while when I was younger and I was consistently surprised at how much power committee staffers had in the legislative process.  The nature of modern legislation is such that members of Congress know surprisingly little about the actual language in the bills, especially obscure stuff like we are talking about here.

If the issue was ever litigated, the court would no doubt talk about "Congressional intent", but it would probably be more accurate to say "committee staff intent".

On the subject of Congressional intent, I always enjoy seeing situations where a federal court cites Congressional intent in reaching a decision and then a few key members of Congress who were instrumental in passing the bill (and likely the only members of Congress who actually had any specific intent when it came to a bill's more obscure provisions) will come back and say no, that wasn't our intent at all.

[Gumby]

MT,

That's true — most Congressmen have no idea what they are voting for. Though it's worth pointing out that the wording of that clause changed a few times over the years. At one point, in 1997, there was a provision that the platinum had to come from the US Mint Facility at West Point. Congress (or some staffer) soon got rid of that language too. I guess they thought it was too restrictive. So, somebody really wanted to keep giving the Treasury Secretary more and more leeway and power on the issue, and it became law.

Again, I suspect that someone wanted it there for emergency purposes — perhaps during a terrorist situation when markets and Primary Dealers were closed. Keep in mind that this power was granted to the Treasury Secretary during the Bush/Cheyney years when everything was about National Security — Henry Paulson was the Treasury Secretary — and the financial crisis hadn't even happened yet.

If you think about it — for national security purposes — the Executive Branch needs to have a loophole to keep the Treasury running in case Primary Dealers are paralyzed and financial markets are frozen up. The government really had to pull some financial strings during the week of September 11th, 2001 and I suspect Paulson didn't want to be in that kind of position in an emergency.

[MachineGhost]

Keep in mind that if the Treasury Secretary were to ever use this law, the debt game would be pretty much over. People would question every aspect of the debt-based monetary system. So, I am fully confident that large-denomination seignorage will never be implemented — except for perhaps an extreme, last resort, situation.

According to some reports, currently over half the revenue of the government of Robert Mugabe in Zimbabwe is in seigniorage.[8] Zimbabwe has experienced hyperinflation (see Hyperinflation in Zimbabwe), with the annualized rate at about 24,000% in July 2008 (prices doubling every 46 days).[9]

[hoost]

How did a Primary Dealer purchase a Treasury Bond if there were no Federal Reserve Notes with which to purchase it?

Federal Reserve Notes are just the name and classification of our paper currency. They only make up a percentage of the total monetary base.

This is a fair point.  I think, as you point out, it's important to draw a distinction between Federal Reserve Notes (FRN's) in physical circulation and electronic reserves held on the Fed's books.

The total of all of the liabilities of the Fed is base money.  When the Fed purchases an asset (usually, but not always, US govt securities), it creates new base money electronically as a liability on its balance sheet and adds the asset to the assets of its balance sheet.  That is, the total amount of base money increases.

When the Treasury sells a new bond, reserves are transferred from the purchasing bank's reserve account to the treasury's reserve account at the fed.  This is a liability-side transaction (on the Fed's balance sheet).  No new base money is created.

The 12 Fed banks each have a giant vault holding FRN's that haven't been issued yet; if the Fed were to issue FRN's to a commercial bank, it would reduce the bank's reserves by the equivalent amount of the issue.  The Treasury's General Account is held at the New York Fed.  When a primary dealer (commercial bank) who banks with the New York Fed purchases a govt security, it is a spreadsheet transaction that occurs on the liability side of the Fed balance sheet.  The physical notes don't move, and no new notes or other base money are issued.

Regarding taxation, when you pay your taxes, this is also a liability side transaction.  Reserves are transferred from your bank's reserve account at the Fed to the Treasury's reserve account at the fed.  No base money is created or destroyed.

Base money is destroyed when the Fed sells an asset, or when a loan is paid off by the debtor.  These two scenarios would result in a gross reduction of the Fed's balance sheet.  The asset would disappear from the sheet, as well as the corresponding amount of Federal Reserve base money.

Regarding where the first FRN comes from, in order for the Fed to loan through the discount window, banks are required to pledge assets as collateral.  Typically, a bank will pledge a security or other financial asset, such as a loan as collateral.  If there was no money (the first FRN hasn't been created yet), securities and loans would not exist, so the bank would have to pledge a physical asset as collateral in order to secure the loan. 

Starting out, no Fed base money in existence.  No govt bonds in existence.  Bank owns a physical asset.

Fed:

AssetsLiabilities
----


Bank:

AssetsLiabilities/Equity
Physical AssetPhysical Asset


Treasury:

AssetsLiabilities
----


Treasury Creates a bond.

Fed:

AssetsLiabilities
----


Bank:

AssetsLiabilities/Equity
Physical AssetPhysical Asset


Treasury:

AssetsLiabilities
BondBond


Bank wants to buy bond from Treasury, but doesn't have any money.  Fed loans Bank base money; Bank posts Physical Asset as collateral.

Fed:

AssetsLiabilities
LoanBase Money


Bank:

AssetsLiabilities/Equity
Physical AssetPhysical Asset
Base moneyLoan


Treasury:

AssetsLiabilities
BondBond


Bank buys bond from Treasury.

Fed:

AssetsLiabilities
LoanBase Money


Bank:

AssetsLiabilities/Equity
Physical AssetPhysical Asset
BondLoan


Treasury:

AssetsLiabilities
Base MoneyBond


Bank has no money to pay back loan to Fed.  Fed buys bond from bank.

Fed:

AssetsLiabilities
LoanBase Money
BondBase Money


Bank:

AssetsLiabilities/Equity
Physical AssetPhysical Asset
Base MoneyLoan


Treasury:

AssetsLiabilities
Base MoneyBond


Bank repays Fed loan.

Fed:

AssetsLiabilities
BondBase Money


Bank:

AssetsLiabilities/Equity
Physical AssetPhysical Asset


Treasury:

AssetsLiabilities
Base MoneyBond


This assumes no interest was paid on the loan.  How would that change things?  This probably has other implications, but it's interesting to follow the transactions and think about what's going on.

[hoost]

The things you said before the following seem logical enough; I don't really disagree (and am not sure that I have disagreed, I don't remember) with any of that.

One last thing to pick your brains about... if ALL the fed can do is trade fiat base money with other financial assets (other forms of money), can it ever truly increase the money supply?  Further, what do you guys think gives our currency value?  Taxation?  Legal tender laws?  Are these not an integral part of what truly creates "money" vs confetti?  If these are rooted in the role of the treasury and the federal government in general, shouldn't we really examine whether this entity is a currency user vs issuer?  Aren't we getting to the point where it's all but proven that they are part of the currency-issuance system, and their appearance is a currency user is just that... appearance?  I mean if any other entity had as tight a relationship with the fed, we'd be appalled, and that's after seeing a lot of backstoping for a big banks by the fed in times of crisis.  The "bail out," if you will, is literally baked into the relationship between the fed & treasury.

One of my points of contention is your assertion that other financial assets are forms of money.  The only other financial assets that are forms of money, in my eyes, are demand deposits.  Every other financial asset must be traded for money, either base money reserves or demand deposits, in order to complete a transaction.  Please provide examples to the contrary if you can think of any.

Legal tender laws, government levied taxes, and prohibitive taxation of potential alternate money are the backbone of the system.  If those were not in existence I agree we would probably just use the paper as confetti.

The federal govt is a net currency issuer, but saying that glosses over the workings of the system.  One of the issues I have with the MMR paper is that he keeps saying he's describing how a fiat based monetary system works, but never does.  This implies a lack of understanding, whether or not it's true.  I have had the same issue with the MMR backers here, in that no one has really demonstrated a full understanding of the inner workings of the system.  This understanding is what I have been searching for and trying to provide, so that we have an intellectual framework within which to discuss the various aspects of the monetary system and its implications on the greater economy.

The Treasury is both a currency user and a currency issuer.  However it doesn't issue Federal Reserve credit; it can only issue coins.  It is a user of Federal Reserve credit.  It may just be semantics, but I think precision is important when communicating complex ideas.  A lack of precision breeds confusion and disagreement, which we have seen countless times in this thread already.

I think it's also important to embrace the reality that the banks are as integral to this system as the Treasury and the Fed.  It would not be possible without them.


---
Edited spelling.

[hoost]

I'll just add that I'm a bit surprised that the incredibly low rates of treasury bonds, up to the cusp of the debt ceiling debate, was all because of peoples' hope that the fed would illegally bail out the treasury, and not because the markets understood the relationship.  We constantly call treasury "risk-free" debt, and I think LW has even referred to it as substantially more free of risk than an FDIC insured account.  That's really saying something. 

Aren't we getting to the point where we should fundamentally rethink the treasury's supposed role as currency USER, and instead look at what they truly are, a partner with the fed?  Without the two operating in unison things would look much different than they do today... treasuries wouldn't be the uber-liquid risk-free instruments they're viewed as. 

I take a different view on the treasury bond/interest rate issue.  To me, it's an issue of supply and demand dictating prices.  The bankers and central banks, who make up the majority of the market for Treasuries, understand that the Fed will always buy Treasury bonds if necessary and there is no default risk.  Moreover, the government would stop funding other activities before it sparked a world war by defaulting on interest payments.  Now that I think about it I actually think reducing the supply of Treasuries (balancing the budget) would have likely increased prices even more, driving down interest rates farther.  It would have at least made it so that the Fed would have to buy less treasuries in the open market to achieve its interest rate policy.

The treasury, fed, and banks are most definitely partners; each has a distinct role that's important to understand.  The Treasury's debt is risk free because of the Fed's ability to buy infinite amounts of it, and the banks' willingness to act as middlemen.  Don't forget that the bankers are as much a part of the conversation as the Fed and Treasury.

[hoost]

See, that's where your logic breaks down. You tell us that our currency could be backed by Mortgage Backed Securities, but then you fail to realize that Mortgage Backed Securities — when held by the Fed — must be paid back in the Federal Reserve System, which requires payments made with base money, since the payments to the Fed must be a transfer of base money reserves. In other words, MBS assets are really just a promise to move base money into another bank's reserve account. So, even if the Fed owns trillions of dollars in MBS, the MBS will eventually be paid to the Fed with base money as the principal and interest is paid off.

In this scenario, MBS are base money.

[hoost]

Either the MBS promises become worthless — and the Fed just takes a loss, which is then offset with Treasury income (and any profits from Treasury income, beyond the loss, are just returned to the Treasury). The Fed wants to own Treasuries because it guarantees it will receive risk-free base money payments to balance its books. But the Fed holding MBS is just a promise from the private sector to deliver base money it doesn't necessarily have, to the Fed, over time. The Fed is way better off holding Treasuries than MBS, because when you unravel the Möbius strip of where the MBS payments to the Fed come from, you find that all the credit in the private sector is really backed by leveraged Treasury debt and paid back with base money that comes from Treasury debt. And any base money that doesn't directly come from Treasury debt still comes from Treasury debt when you look at the composition of those credit instruments and their principal payments when all of the net credit is zeroed and paid off.

The Fed can never take a loss.  The Fed doesn't hold Treasuries because they are risk free.  Treasuries are risk free because the Fed holds them.  You're putting the cart before the horse.

The Fed holding MBS creates base money.

If all of the credit and debt in the entire economy (public and private) were paid off, you would be left with gold and treasury coins backing the remaining Fed currency.

Treasuries are the only way to add net financial asset to the private sector. If you are aware of another way to add net financial assets to the private sector, please let us know.

I've asked several times now and I'll ask again:  what are "net financial assets"?  I've combed through your MMR paper several times and the term is used in a contradictory way in that paper as well, so please provide a definition so we all know what you're talking about and have a basis for conversation.

[steve]

Back to the topic:
Looking at my 2012 year to date this morning May 15 2012
I am plus 1.46%
everyones results should be slightly different depending on last rebalance and individual holdings for example bond holdings.
my last rebalance was End of Jan 2011
I hold TLT,VGLT,EDV for Bonds they now =29.29% of portfolio
Gold now = 25.31%
Stock VTI now = 22.20%
Cash now = 23.20%