The Treasury is the outright desk and the Fed is the swap desk

One way to think about the fundamental difference between the US Treasury and the US Federal Reserve bank is that the Treasury is the ‘outright’ desk and the Fed is the ‘swap’ desk…

The US Treasury, led by the Treasury Secretary, who is part of the president’s cabinet, is a politically-biased Department within the US federal government. The US Federal Reserve bank, led by the Chair of the Board of Governors of the Federal Reserve System, is a non-politically-biased, independent agent within the US federal government…

The Treasury creates money for whatever ‘outright’ spending for fiscal stimulus it deems necessary to provision the short-term needs of the federal government and to achieve the long-term interests of the country, only after getting approval from Congress which has the so-called power of the purse. The Fed creates reserves for whatever ‘swap’ spending for monetary accommodation it deems necessary to achieve full employment and price stability and/or to contain a financial panic acting as ‘lender of last resort’, only after getting approval from their own Federal Open Market Committee and/or their Board…

The huge difference between these two ‘desks’ is that when the Treasury creates money to buy a new battleship or to pay for new highways for example, these newly created dollars are directly entering the money supply to pay the shipbuilder or the road construction companies (there is an ‘outright’ addition of dollars). When the Fed creates reserves to pay for securities bought in normal open market operations to manipulate short-term interest rates lower, or to pay for securities bought in not-so-normal Large Scale Asset Purchases (“QE”) to manipulate long-term interest rates lower, or to lend reserves to backstop a struggling financial institution that is too ‘interconnected’ to fail, for example, these newly created reserves are at the same time, and by the very exact same dollar amount, UNPRINTING those securities, those assets, that collateral, like Treasury bonds or mortgage bonds or toxic assets, out from the secondary market (there is no net addition of dollars, only a ‘swap’ of dollars).

Another distinction is that the money that the Treasury ‘outright’ desk creates goes right into the money supply, while the reserves that the Fed ‘swap’ desk creates does not. Why so many were so wrong that the Fed’s Large Scale Asset Purchases would trigger higher interest rates, hyperinflation, a debased dollar, US economic collapse, etc., is simply because none of the dollars swapped around by the Fed in both normal conditions as well as in crisis mode are ever part of the money supply at all. The reserves created by the Fed to pay the sellers of those bonds during LSAP, or the reserves created by the Fed to make loans to needy financial institutions in exchange for collateral, only adds reserves in the US banking system which is not part of the money supply (reserves are instead part of the so-called monetary base). The Fed is hoping that their monetary accommodation strengthens the economy, and those created reserves are then lent out by the banks, which eventually leads to an expansion of credit, actual creation of money, but the Fed’s actions alone doesn’t create money, or never directly affects the money supply, and why the Fed doesn’t consider or even call the reserves they create ‘money’ (reserves are instead more like ‘pending’ money). Also not affecting the money supply are those bonds or collateral assets that are ‘unprinted’ out from the secondary market when simultaneously purchased by the Fed, or another way of putting it, ‘impounded’ into the Fed’s balance sheet. After the financial institution that the Fed helped is back on its feet, and later on when the Fed wants to tweak short-term interest rates higher, and finally when the US economy gets back to ‘normal’ strength and the Fed ‘normalizes’ rates, in all these events, the Fed simply swaps all these these Treasury bonds, these mortgage-backed securities, these collateral assets that are on their balance sheet, back to whence they came. When doing this, the Fed effectively ‘unwinds’ the original swap position, by simply selling these assets. Another way of putting that, the Fed credits, or ‘prints’ these assets right back into the secondary market where they came from, and debits, or ‘unprints’ the exact same dollar amount of reserves out from the eventual buyers. The Treasury, on the other hand, never makes transactions with the intention of unwinding them (returning the battleship back to the shipbuilder). Unlike the Fed swap desk, all Treasury desk transactions are outright, or another way of putting that, all ‘sales’ are final.

What about all that money being created by the Treasury when the federal government deficit spends, isn’t that adding to an unsustainable debt that will harm the financial future of the country? While politicians that need your votes, financial ‘helpers’ that need your life savings, newspapers that need your subscriptions, and cable news or talk radio shows that need your ratings will want you to think that, and fear that, the answer is no. You need to worry about our US federal government’s Treasury, the issuer of fiat dollars, ‘paying back’ that money they created and spent as much as you need to worry about ‘paying back’ all the oxygen that you have breathed since the day you were born. The non-federal government (you, me, all households, all businesses, all local & state governments) meaning, only the rest of us, are in debt when printing money, or deficit spending dollars because we are not the issuers of dollars. People using outdated, gold-standard-era mentality think the public still finances the federal government’s deficit spending with the public’s surplus savings of gold-backed dollars. In the post-gold-standard, modern monetary system however, it is now a different paradigm: The federal government’s deficit spending finances the public’s surplus savings of fiat dollars. Why the money created by the federal gov’t when deficit spending is not actually debt at all is a whole other story. May I recommend you read it:   http://thenationaldebit.com/