First, the overview:
With the fractional reserve system, money/credit is primarily created through loans on deposits but the bank is required to maintain their deposits up to a certain amount (roughly 10% I think). The other primary avenue of money creation is by the Federal Reserve printing money, but there is severe reservations on printing money given past episodes of hyper inflation, though recent events with quantitative easing and large scale asset purchases, the Fed's balance sheet has reached over 4 trillion dollars. The Fed has stated that any profits accumulated from these assets will be reinvested into new securities when they mature and any additional profit will be deposited into the treasury.
Here is my question:
If the federal reserve were to regulate the banking industry so that fractional requirements were raised to something like 50% on all future deposits, that would have an appreciating effect on the dollar since the rate of increase in the supply of dollars needs to keep up with the growth of the economy every year. If the Fed offsets this appreciation with additional asset purchases by printing money, the Fed's revenue/balance sheet would increase... and over time that excess profit could start to make up the overwhelming portion of the fiscal budget (which could take decades or centuries)... Historical issues with the central bank funding the budget have always resulted in hyper inflation, but with this work around, where the funding of the budget was not coming from the direct printing of money but from the profits from security purchases as they matured, hyper inflation would be avoided, right?
Please explain why this is a bad idea... In theory the banking system wouldn't have a noticeable impact since, as additional money is created to offset the increased fractional requirements, that money will be deposited into the banking system (where else would it go) increasing holdings and increasing the money available to be lent out...
This is in essence what the Japanese have been doing with paying off Government debt in order to prevent their currency from appreciating naturally (instead of raising reserve requirements), right?
Response (wasn't allowed to respond at length so I'm making an edit to my original post):
Lending would have "some" reductions, but it wouldn't be as severely impacted as it would if it weren't offset by more asset purchases, purchases that are then deposited into banks, expanding the monetary base which then expands the amount to be lent out... There's also the argument that, by replacing tax's with the profits from maturing assets, there would be a stimulating effect on GDP, which would cause the dollar to appreciate, which would then require more printing or lending to maintain stable prices... though of course it would take a significant amount of time for profits on maturing assets to become a sizable portion of the fiscal budget, but of course the FED isn't purchasing securities with the idea of maximizing revenue so I'd imagine their rate of return could get a little better if they really tried and this where to become a primary mandate...
I'm definitely not saying raising the supply of dollars increases their value, the opposite actually... My argument says raising reserve requirements would reduce the supply of dollars, but printing would offset this reduction, maintaining the equilibrium. I suppose an implicit assumption I didn't spell out was that the amount of dollars printed would not equal the number of dollars no longer being lent out since fractional banking has the multiplier effect, i.e. today one dollar created by the FED is equivalent to 9~10 dollars lent out in the banking system.