This was a response to Detroit Dan in comments here, but since the comment is about an Yves Smith post that I have to linked to here and here, I'm posting my reply here for those who may also be wondering about the recent Fed accounting change. The Yves Smith post is a discussion of how the Fed plans to handle any interest rate/market loss it could incur if it decides to sell the hoard of Treasuries it bought via QE2.
Basically, if the selling results in a net loss to the Fed, it will just consider the current loss to be deductible from the amount of profit it sends to the Treasury the next time it has a profitable year. So during the year that it incurs the loss, it actually receives a "credit" from Treasury.
A comparable scenario in private business is if you have a business that incurs a loss this year, you just say "it's okay,I will in the meantime just consider the loss as a shareholder loan from me payable to me the next time the business is able to". This can go on indefinitely if you are like the Treasury, which can just debit-credit the losses until the Fed finally is able to pay again. But you, as a currency user, will have to fund the loss with actual money, while the Treasury, a currency issuer, doesn't.
Thursday, April 21, 2011
Subscribe to:
Post Comments (Atom)
5 comments:
so this is really happening? Are we able to recover the loss?
John, well it was reported in the news as being part of a Fed announcement. So the Fed must be preparing for the possibility of having an accounting loss.
But I wouldn't worry about the fed's accounting loss. It's just an accounting loss, and it's supposedly a loss to the the one who prints the currency. How can the one who prints the currency really lose? I would worry more about what it's doing to the currency, and how it encourages people to speculates on asset booms. If the Fed has unlimitted power to do this, the fact that it's doing so is what should be worrying.
This is good site to spent time on .I just stumbled upon your informative blog and wanted to say that I have really enjoyed reading your very well written blog posts. I will be your frequent visitor, that's for sure.
Great information shared on this. I have visited many posts on your site and found very interesting.
woow,,, so this is really happening? Are we able to recover the loss?
Post a Comment