Let's compare the Fed's "gamble" with helicopter money.This is a very interesting take on the changes in the Fed's balance sheet, one that Nick Rowe further elaborates on over at the Worthwhile Canadian Initiative. He is beginning to give me hope that maybe there is a well-thought out plan behind the deterioration of the Fed's balance sheet. What would fully bring me peace is if Nick Rowe could also explain what the Fed will do once the recovery is secured and inflationary pressures loom.
With a "helicopter" increase in the money supply, the Fed's balance sheet shows a new liability, and no new asset.
That is equivalent to the Fed buying an asset, with newly-printed money, and then the asset turning out to be worthless.
In other words, if you believe that a "helicopter" increase in the money supply is what is needed to get the economy out of a liquidity trap, then the destruction of the Fed's balance sheet net worth is exactly what the Fed is trying to achieve.
The only difference between helicopter money and the Fed's buying a worthless asset is in who gets the money: the person who picks it up off the ground (i.e. the one who receives the government transfer payment); or the person who sold the fed the worthless asset.
Let me put it another way: if it lost the gamble, the Fed would be forced to print money to make the same monthly transfer to Treasury, and this would be inflationary. But the expectation of future inflation is exactly what the Fed needs to create now, to escape the liquidity trap. This is a gamble the Fed wants to "lose".
Update: See the comment section for Nick's answer to my question on inflationary pressures.