Chapter 7
Would Stimulus without Debt Weaken the Fed’s Balance Sheet?
At first glance it might seem that stimulus without debt would cause the Fed to have a balance-sheet problem. Why? When the Fed buys a Treasury bond in the open market, it obtains an asset, but if the Fed gives the Treasury a transfer, it obtains no asset. On the Fed’s balance sheet, the Fed’s “capital” (“net worth”), defined as assets minus liabilities, would therefore be reduced by the amount of the transfer if the Fed gives a transfer instead of buying Treasury bonds. But the Fed can avoid a balance-sheet problem by taking the following action. Just before the Fed writes its transfer check to the Treasury, the Fed should order an amount of new Federal Reserve notes (from the usual place, the Treasury’s Bureau of Engraving and Printing) equal to its transfer to the Treasury and then store these notes in the Fed’s vault. Cash in the Fed’s vault is an asset on the Fed’s balance sheet, so the Fed’s total assets would increase by an amount equal to the Fed’s transfer to the Treasury—the same increase in total assets that would have occurred if the Fed had instead spent the same amount of money buying Treasury bonds. Moreover, just as Treasury bonds 137
