the consolidated balance sheet of the Fed and Treasury is subjec

Every asset can be thought of in terms of demand and supply, including Federal Reserve deposits. Under your proposal, the supply of deposits would be, say $9 trillion. And what makes the demand equal to $9 trillion? Your answer is, the interest rate that the Fed promises to pay. And with what do they pay this interest? By creating even more reserves next month, is your apparent answer.

And can the government just create wealth out of nothing with this Ponzi scheme? My answer is certainly not. My answer is that the consolidated balance sheet of the Fed and Treasury is subject to an intertemporal budget balance requirement, such that the real resources that the government uses to purchase goods and services are balanced over time by the real resources that the private sector delivers to it in the form of tax revenues and seigniorage.

If we were to try your plan, the government would acquire resources equal to the outstanding debt, and the seigniorage would come in the form of a mighty impressive rate of inflation.

In other words, my answer is the same as Cedric Regula's.

Posted by: JDH at October 4, 2010 06:39 PM