In a column today, Higgs states with regard to Federal Reserve money being offered to Freddie Mac and Fannie Mae that:
...because the Fed itself is the lender, the loan will take the form of newly created money – that is, the loan will be pure inflation, a hidden tax on all assets denominated in dollar units, including dollar balances themselves.
The Fed to date has not been inflating as a result of recent money injections into the financial sector. It has been sterilizing its transactions by selling Treasury Securities it owns to finance the injections, from over $800 billion in Treasury securities owned last year, the Fed is down to only $380 billion.
In the last two months, the money supply measure M2NSA has not grown at all.
Fed lending creates money. Fed open-market selling destroys money. These are two separate Fed actions. If our interest is in what's happening to the money stock, then the Fed's carrying out these two actions simultaneously--the second being said to "sterilize" the first--is important to notice. But such sterilization does not change the raw fact that Fed lending per se creates money. And this is the relevant raw fact if our interest is in the Fed's bailout of Fannie and Freddie. This action, ceteris paribus, creates new money and therefore imposes the inflation tax.
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