Edwynn
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"Federal Reserve Act Section 2a. Monetary Policy ObjectivesThe Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. [12 USC 225a. As added by act of November 16, 1977 (91 Stat. 1387) and amended by acts of October 27, 1978 (92 Stat. 1897); Aug. 23, 1988 (102 Stat. 1375); and Dec. 27, 2000 (114 Stat. 3028).]"
The original charter mentioned the process of issuing currency, the ability and expectation to both/either increase or decrease the money supply in fulfillment of the mandate of full output/employment consistent with low/stable inflation.
When the fed feels it time to reduce the money supply, it sells the bonds it had been buying earlier, the payment in cash from the dealers removing money from circulation. Whatever money the fed puts into circulation at one time it removes at least some portion of (or perhaps more than) later when the economy is heading towards price/wage increase pressures. The money put into circulation at one time does not all stay there forever. The performance of the economy determines these actions.
Whatever securities the fed is holding as result of increasing the money supply earn interest, and that interest (almost all of it) is paid to the treasury yearly.
Fed wants to increase MS: it buys bonds, the cash paid being put into circulation.
Fed wants to decrease MS: it sells some of its bonds, the cash paid to the fed then removing money from circulation.
The fed holds this cash until the economy dictates another round of the fed's bond purchasing. So the fed "creates" money only when their reserves of cash are depleted during times of very large purchases, not for each and every bond it buys from the start of the purchasing cycle. When the economy improves sufficiently, this "created" money is then "destroyed," but not quite all of it, so as to prevent or prolong having to "create" more during the next purchasing round.
Oversimplifying a bit, the fed increases MS when the economy is down, historically to make investment cheaper and ultimately reduce unemployment. It decreases MS when prices are going up too much, as when the economy is starting to exceed capacity.
As I say, oversimplified, but it explains the actions of MS as related to the mandate of unemployment and inflation.
All major central banks have roughly the same mandate, but worded differently and somewhat prioritized differently.
So there is nothing new here that hasn't been going on since the fed's inception, or what is similar to how all major central banks operate, except that the financial industry's numerous torpedo hits to all the credit markets and the entire economy has required the unprecedented amount of securities purchases (certainly arguable as to exactly what extent), hence the unprecedented profits from the interest being earned on those securities.
The even better news will be when the fed's profits go down as result of holding far fewer securities than at present, indicating that the economy is back to normal.
What tazzy touches on is definitely true also, i.e we spent and spent and kept accepting all the card limit increases the banks threw at us, and in the aggregate net private savings have been negative for a long time. Even when the government had a budget surplus for a couple of years in the late nineties, national savings (private + government savings -the government surplus in this case) were negative because individuals and businesses spent so much as to easily negate the budget surplus.
< Message edited by Edwynn -- 3/23/2011 12:47:01 PM >
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