Once Congress authorizes the Fed to print a certain amount, do you think they sometimes might go a bit overboard and print more than authorized, because after all, it is just a few button-presses on a keyboard?
Like a Whoospie moment? Lord knows I would with heavy metal music pumping through the Central Bank's Musak™ feed though the overhead speakers.
That's funny, but actually these things are tightly controlled and the accounting is in the public domain, though portions may see delayed release. It would be hard for the Fed's finger to linger too long on the printer's on button without getting caught. The Treasury might like it though. It would be like you or I checking our bank account and finding we have a few extra hundred billion more than we realized.
The amount of new money created equals, to the penny, the Deficit. So if there is no deficit, there is no new money created. If the government runs a surplus, the total amount of money in the private sector decreases by the amount of the surplus, to the penny. Deficits are the mechanism by which new money enters the private sector economy. So you can see why, at minimum, small deficits are needed to accommodate growth in the economy. The Fed does print whenever there is a net overdraft in the Treasuries accounts.
But the Fed has no control over the amount printed. This amount is determined by Congress when they decide on the level of taxation and spending.
Whenever the Treasury spends in deficit, they
subsequently issue securities in the amount of their overdrafts. This is where, for understandable reason, the people get the idea that the Treasury is "borrowing" the amounts it overspends. In realty, the Treasury, unlike what you or I can do, has long since spent and overdrawn its accounts before it issues related securities. Said another way, it spends then appears to borrow. You and I really do borrow, and
then we spend. BIG DIFFERENCE!!!
In a sense, the Treasury is incapable of overspending; instead it is the Congress that can do it. The Treasury only spends what it has been directed by Congress to spend, and if that happens to be more than the Treasury has in its accounts, then Congress uses the Central bank to "print" any additional needed.
Amazingly, deficits by themselves don't result in an increase in the money stock as measured by M2. Why? Well it's because
all of that newly "printed" deficit money being spent into the Private Sector is being absorbed and sidetracked into Treasury Securities
after it has been created and spent into the economy.
We can get a correct understanding of the overall picture if we view Treasury Securities as just another form of U.S. money, albeit an interest paying form!
Now, what the Fed does do is determine how much money tied up as Treasuries it wants to convert back into money stock that is easily usable to make private sector payments, and how much to leave sidetracked as securities, and therefore not be a part of M2. The Fed does this by buying and selling Treasury Securities, mainly bonds. When it buys them, the Fed is converting them to bank reserves; when it sells them it is converting reserves back into Treasuries. Understanding this also explains why the Fed always buys and sells securities on the secondary market and does not transact directly with the Treasury. These transactions must take place between the Government, i.e., the Fed, and the Private Sector, because the transactions must register in private sector, reserve accounts for them to have the desired effect. If the Fed transacted directly with the Treasury, the transaction would register in the Treasury's account, defeating the transaction's purpose.
It's in making the decision on the ratio of money in the form of Bank Reserves to that in the form of Treasuries that the Fed may make mistakes. Some time back the Fed dropped the reserve requirement and moved instead to regulating interest paid on reserves and the discount rate as it tools of choice to control the funds rate.
No one will every accuse the Fed of being overly adventurous, the little bits of creativity they have evidenced has always been in times if crisis, when something simply had to be done. Right now they are determined to cause a recession to stop inflation. Not very imaginative, but what else might they do? The Administrative and Legislative branches of government, however, hold all the wild cards. Sadly divided government has resulted in partial paralysis. There are undoubtedly better ways to tackle the current inflation than intentionally putting a few million out of work -- which, I believe, is going to be more difficult than the Fed realizes under current economic conditions. In any case, implementing better alternatives via Congress would require two functional political parties; currently we only have one.
