The Fed, Gold, and MMT

The price of gold (POG) is the inverse of the value of a country’s currency. Changes in the POG reflect changes in a currency’s value, not in gold’s value which is stable. If gold supply and demand determined the POG, we would see inflations or deflations across all countries simultaneously. Gold supply and demand would also result in changes to annual gold production rates that have remained stable at 1.5% to 2.5% for centuries.  Because of its unique monetary properties, gold negates the supply and demand component common to all other commodities, goods, and services. 

More obvious when looking at the dollar POG is that new dollar creation—whether viewed by M1, M2, Fed balance sheet increases, debt levels, deficits, or new spending outlays—indicates a rising POG.  This may or may not be true. It is important to understand the Fed’s balance sheet. 

The current Fed balance sheet of January 21, 2021, shows the following:

Reserve bank credit – $7.375 trillion (total Fed balance sheet)

Currency in circulation – $2.095 trillion

Excess Reserves – $3.155 trillion

Treasury General Account – $1.627 trillion

Let’s compare that with January 02, 2020, Fed balance sheet.

Reserve bank credit – $4.134 trillion (total Fed balance sheet)

Currency in circulation – $1.806 trillion

Excess Reserves – $1.616 trillion

Treasury General Account – $.383 trillion

A 78 percent increase in the Fed’s balance sheet in one year is alarming and indicates dollar devaluation, but it requires a closer look to understand what is happening.  

The only money is base money.  Base money is cash and reserves.  Excess reserves (ER) and interest on reserves (IOR) began in 2008 and is an anomaly to historical Fed operating policies.  One can view ER as base money reserves that don’t exist—as long as it remains ER.  The Fed creates base money by purchasing bonds, usually treasuries and MBS, from primary dealers on the secondary market. The Fed’s bond purchases since the 2008 financial crisis have expanded its balance sheet by a factor of 9X, increasing it from $.8 trillion to today’s $7.3 trillion. This massive increase in bond purchases (QE) has driven interest rates to the zero bound. The Fed’s brief attempt in 2018 at normalization—reducing its assets—quickly collapsed.  Controlled interest rates near the zero bound fund accumulating budget deficits and debt loads.  If interest rates rise to normal historical levels, the debt load becomes unsustainable without a return to stable money and fiscal growth policies.  

The simultaneous withholding of a portion of the newly created base money as ER limits the actual “effective” supply of base money. The Treasury General Account held at the Fed also removes reserves on a one to one basis from the banking system.  In the last year, the Treasury General Account has increased by $1.25 trillion while ER has increased by $1.54 trillion for a total of $2.79 trillion.  This is $2.79 trillion of newly created base money that is withheld from the reserve system.  In essence, it doesn’t exist on the Fed’s balance sheet as an inflationary force.  

Looking at January 21, 2021, Fed balance sheet, the total of ER + Treasury General Account = $4.782 trillion. Subtract from the Fed’s total assets of $7.375 trillion, and you get an actual “effective” Fed balance sheet total of $2.59 trillion.  If you do the same calculation for January 02, 2020, you get a Fed balance sheet a year ago of $2.135 trillion.  The Fed’s balance sheet has increased 22% in real terms rather than the apparent 78%.  

Interestingly, the POG over the same one-year period has increased 24%–in line with the “effective”  22% increase in the Fed’s balance sheet.  This is the gold signal.  The POG accurately reflects changes in the supply of base money relative to demand.  While demand over the previous year is indeterminate, supply is known.  Faith that the dollar will maintain some semblance of value affects dollar demand and can change rapidly.  What one can determine from analysis of changes in the Fed’s balance sheet over the last year is that the POG is accurately signaling inflationary forces—though they remain subdued for now. 

If Treasury started depleting its General Account through spending, reserves would increase on a one for one basis.  If those reserves were not held as ER, then inflationary forces would increase correspondingly.

With the apparent increase over the last year in the Fed’s balance sheet—as opposed to the “effective” increase—modern monetary theory (MMT) has come into vogue as the economic theory du jour.  If the Fed can increase its balance sheet with no apparent inflationary pressures, why can’t the Fed print unlimited dollars to finance everything the federal government wants and we’ll all live happily ever after?  That’s MMT theory in a nutshell.

The Federal Reserve Act of 1913 separated the Fed and the Treasury for the express purpose of preventing the Fed from directly funding government debt.  That’s why the Fed buys bonds on the secondary market from primary dealers and not directly from Treasury.  There is no difference in the Fed’s balance sheet’s growth over the last year in response to COVID as there would be in response to the federal government funding foreign aid, useless wars, shovel ready projects, bridges to nowhere, great society programs, or any federal government outlay.  

The only way MMT can come into existence is if Congress amends the Federal Reserve Act to allow the Fed to purchase debt directly from Treasury.  In this case, the Fed and Treasury will become one entity.  There would be no brakes on the Fed monetizing government debt, and the POG would soar. 

The Fed won’t do MMT.  It would make the Fed Chairgenderbinaryneutral irrelevant and unable to ascend to the title of “Maestro.”  It has other plans.  Central bank digital currency (CBDC) is coming as the means for increased centralized control.  If Klaus Schwab gets his Great Reset, CBDC will be the totalitarian financial arm of a cashless society. One should not confuse CBDC with a Bitcoin-type decentralized cryptocurrency and blockchain.  CBDC will be digitalized fiat in our cashless brave new world.  


  1. Jonathan

    I love this line:

    “If Klaus Schwab gets his Great Reset, CBDC will be the totalitarian financial arm of a cashless society.”

    I went into a cafe last week as for the first time was not allowed to pay in cash.

    Another great post Mike.

  2. Andrew

    I’m missing something – Treasury says we want money and gets it from bond dealers who buy the bonds. The bond dealers sell those bonds to the Fed and the Fed holds them with no spending. I get that part – then what happens when the bonds the Fed bought mature? Treasury in theory gives money back to the Fed pulling money out of the system – if they don’t then the money stays in the system and the Excess Reserves disappear and a rampant increase in money supply. What step am I missing ?

    1. Michael Kendall (Post author)

      The Treasury issues interest-bearing debt and collects taxes to fund the government. The Fed exchanges non-interest bearing debt, base money—cash and reserves—created out of thin air, for interest-bearing debt, bonds, to provide liquidity the economy requires. When the Fed sells a bond or allows a bond to mature and roll off, it extinguishes that portion of base money created out of thin air. On a gold standard, the Fed would only create or extinguish base money required to maintain the fixed dollar parity with gold. Our current Fed PhD fiat standard creates base money at whim for reasons other than dollar stability.

      Typically, the Treasury’s account at the Fed is fairly limited. In the last year, it has exploded. See link below. If Treasury issues massive debt to fund the government and then takes the proceeds and puts them in a deposit account at the Fed, it begs the question; what’s the point?

      The Fed stated it would soon normalize its balance sheet after it started QE in 2009. Twelve years later, its balance sheet keeps expanding. Treasury now has massive funds in its General Account at the Fed. I don’t see how Treasury can spend those funds under current conditions without their return to the reserves system being inflationary. Will Treasury now maintain a permanent massive account at the Fed along with massive excess reserves?

      What we’re talking about is the Fed making things up as it goes along to keep the system going.

  3. Andrew

    Is it because the Treasury has told the banks they can’t spend a certain amount (reserves) of money?


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