Federal Reserve Notes are the greenbacks you have  your wallet.  They are in fact liabilities of the Federal Reserve, thats why they are called "Notes".   Banks do things backwards accounting wise.  Their liabilities are what you call assets.  They are offset by asets in the form of many types of investment (including Government bonds which the Bank is requred by law to hold).  There is little invested or surplus capital because the Fed must turn its profts over to Treasury each year. 

Gold is a great standard but there hasn't been enough of it mined in all of history to adequately back up the currency now in play.  No currency in the world attempts a gold standard.  If this country tried to return to a gold standard today, it would have to acquire all of the gold in the world and then set a price for gold hat would be far beyond its intrisic commercial usefulness.  Anything less would immediately devalue any wealth you may happen to have.

The FED can influence the economy in two ways, open market operations or fiddling with the demand deposit reserves member banks must keep at FED, and the multipler of these demand deposit reserves banks can lend.

For a long time FED has depended on open market operations and not with reserves.  Their power can influence interest rates it cannot set them.

Operated effectively, these powers let the FED heat up or cool down the economy to the extent they can by setting a benchmark rate.  No one is required to use this rate, it is set to influence the market.

Banks follw the FED lead because the FED regulates them, it is not in league with them.

Unlike most national banks, the FED cannot monetize the debt until ordered to do so by Treasury.

The FED published a weekly report that deals with a supply of money called "M1".  These were the deposits of banks that could be demanded from customers immediately.  Mostly checking account balances but I'm sure money market accounts fall into this category today.  Other supplies of money "M2 and M3" consisted of savings accounts and cds and other instruments used by the banks from which they could lend.  Member banks must keep a portion of this M1 money (10% for a long time) deposited at FED at all times.  This is called the bank reserves.  Banks are not required to keep reserves for the other categories of money because it is not available on demand and therefore does not have nearly the impact of M1 on bank liquidity.

In any event, the report you describe reports what the FED does with these reserves in terms of investments and FED efforts to preserve bank liquidity.  These reserves are reasonably stable and are invested by the FED in a number of investments they purchase and sell on the open market through a system of open market traders. 

As banks grew less willing to lend during this recession they became more liquid. Over the past year more money became part of M1.  Consequently, the total amount on reserve grows, the liabilities of the FED grow (the reserves are only deposited in FED, not given to FED) and the assets of the FED grow. 

This part of FED's activities doesn't worry me.  As the supply of M1 declines, so will the reserves and so will the FED balance sheet.  The FED believes it can siphon back the excess cash if the economy picks up prior to inflation hitting.  I hope they are right.

The part where it gets scary is when the Treasury gets involved.  When FED is ordered by Treasury to do so it will print money and offset it by loans to the Government.  No external capital investment is involved.  It is called "monetizing" the debt.  This is far different than normal Treasury issues to finance deficits.  At least these bonds issued require a the private market for long term debt to spend capital to buy the bond.  This does not impact the supply of money.  Monetizing does increase the supply of money because the Government is borrowing from itself to pay the bills.  No money is removed from the supply to pay for this debt.  Remember, the FED does not do this on its own, it does not have the power to monetize debt, Treasury does.

The petro sheiks have no problem investing their money.  The world is their cupcake.  The last thing they are interested in is investing in a country that is spending it's way into oblivion.  No, they are laughing on their way to the bank because they know we are stupid enough to pay up to $4 a gallon to fuel our life style.  They can jack up their prices any time they wish and we will pay it.  We are being blackmailed.  Pure and simple.  The only way to beat a black mailer is to destroy his leverage over you.  We should be paying $4 a gallon now and forever and the difference between that and the oil price should be paid against the National debt or used to develop alternative fuels.  Anything but giving it away to the sheiks.

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