Reply To: Inflationary vs non-inflationary deficits


If you’re referring to the Fed and not commercial banks, then we can look at its balance sheet to see which liabilities increase as it increased its Treasury holdings.

The PP slides on the Fed’s balance sheet are in the lecture on monetary policy.

Here’s the summary:

On Jan. 30, 2003 the Fed held $630 billion in Treasuries (an Asset) against $643 billion in Federal Reserve Notes (a Liability).

On April 4, 2012 the Fed held $1,669 billion in Treasuries and $837 billion in Mortgage Backed Securities against $1,060 in Federal Reserve Notes and $1,542 billion in Deposits.

The Fed has expanded base money from $669 billion to $2,602 billion to buy the additional assets. The Fed’s equity (past “profits” it is holding) rose from $17 billion to $55 billion over the same period. So, clearly, the Fed did not draw down its accumulated “savings” to pay for acquiring the additional assets.