How Money is Created through Debt in our Fiat Economy -- Starting from Scratch

It does prove it, because the nonbank public hold the debt.

Which is why its a wash. Deposits decrease when money is lent to the Govt, and increased when the Govt spends. No net change in deposits.

It represents SS taxes that were paid (decreasing deposits) that were taken by the Govt in exchange for the IOU). You still have the decrease in deposits from the taxes.

It is. But the other $12.5 trillion has nothing to do with the Fed creating money. We didn't need the Govt to incur that extra 12.5 trillion in debt for money creation purposes, even if we were to agree that the Fed could only buy Govt debt.

Why is it necessary for the Fed to create reserves to make Govt spending usable in the real economy?

 

No, I believe the Feds create reserves to manage the supply of money in the economy, as determined by the FOMC.

Govt spending has nothing to do with it.

Where does the Govt get the money to spend if it doesn't have it?

 

So if the Fed creates reserves, where does the Govt get the reserves to spend if it doesn't have it?

 

Assuming other banks didn't lend money, but loans receivable are not money.

No, because some of the money was created by the Fed from purchasing assets other than Govt debt. Gold and commercial paper are two examples.

So is Govt debt.

That doesn't refute what I said. I agree the Fed can do that.

I agree it would have an effect. But the Fed could replace the US Treasuries with other assets.

The main point here is that US Govt debt does not equal money (deposits or reserves) created. Only that portion purchased by the Fed creates money (reserves).

 

I still don't understand what you mean "making Government spending usable to the private sector". I don't even know what that means, much less how the Fed plays a role in it.

The Govt doesn't have to spend the money first. The Fed has to create the reserves first, or the Govt has nothing to spend. See post #326.

 

And we are in the same place, money wise, as before.

We have $1000 in reserves, and $5000 in deposits.

Your own example as proved that the Govt paying off the $500 loan held by the nonbank Public has had no effect on the money supply.


That is what I've been saying all along. The Govt paying off or incurring debt has no effect on the money supply, either deposits or loans!

 

And we'd be right back where we were in #326. So the Fed would buy gold or commercial paper to get money back into the system.

But the point is, it's not the Govt debt that changes the money supply. With your own example you proved that the Govt retiring debt creates no change. Same with borrowing.

It is only when the Fed buys or sells assets that reserves, and ultimately deposits, are created or retired.

 

The Fed would have to buy other assets to substitute.

It doesn't matter what the Fed buys. The key it is the Fed buying assets, not the Govt borrowing, that creates money.

 

Your own example proved it, where the Govt retired $5000 of its debt, with no change to deposits or reserves.

 

Yes and 'soundness' used to be based on Gold. With the introduction of fiat money, that 'soundness' is relative to the machinations of the economic system and is subject to media/political manipulation. In other words, a fiat money system takes economic power away from The People and and gives it to government.

 

They hold the debt because they were given the money to purchase it.

This is based on pure assumptions. I have already proven that Primary Dealers DO hold on to a lot of debt before it is purchased by the Fed or purchased on the secondary market. And the fact that the market for treasuries right now is in incredibly high demand, it does make sense that the Primary Dealers would have a minimal amount of treasuries on hand.

But this does not PROVE that Government spending is a wash.

Yes, a deposit is decreased and a deposit is increased. It is a wash... nothing was created other than debt in which the Govt issues and purchases. It means nothing more than how much the Govt can spend in the future. And when they do spend that money, they will have to issue treasuries to spend, since that money doesn't exist in our system... accounting-wise.

We wouldn't have $12.5 trillion for the Government to tax unless it spent $12.5 trillion. The Fed doesn't affect the money supply (M1 and M2) when it purchases Government debt. It affects the base money supply.

Because as the original post has shown, the Fed is responsible for creating reserves and currency. The deposits (which is a form of money) has to exist before the Fed can create reserves. The Government creates money by increasing our deposits. We just can't use this money unless the Fed makes it usable for us.

 

If people want to be accurate, they just need to understand this.

The Fed and only the Fed creates reserves.

Bank lending also creates deposits.

Govt spending does not, because deposits created are offset by deposits reduced by people paying taxes or buying Govt debt.

 

The Fed purchases assets that were purchased with EXISTING money. The Fed does not create money. The money still exists in the form of deposits, the Fed simply converts this assets in to reserves/currency.

The Fed has no control over who gets money or how much money the Government wants to spend.

 

This is a lie Iriemon and you know it. You are making the assumption that all Govt debt is purchased by the nonbank public so Government spending is a wash. That is a logical fallacy.

I have already shown you that the Primary Dealers had $800 billion on hand last year for the Fed's to purchase. That right there immediately debunks your claim that Government spending does not create deposits. Since that $800 billion includes $800 billion in deposits created. And that $800 billion represents 8% of our public debt outstanding.

 

Sounds neat. I want to buy Govt debt. Who gives me the money?

You haven't proved it at all. You simply asserted it.

I proved that *all* banks held $269 billion in 2010, meaning dealers held less, if any.

It does, because when the nonbank public buys Govt debt, their deposits decrease. Do you need me to copy and paste the transaction again?

Sure it does. There are trillions sitting around.

Whoo boy. Back to the basics. I thought we already agree on this. "Base money" are reserves, are cash, are high powered money, right? When the Fed creates reserves by crediting the sellers bank account, his bank gets more reserves and deposits. So how can you say that it doesn't affect the money supply?

Your OP is not authority. Your reference to it as if it is some credible authority is not valid.

The initial deposit is created when the Fed creates the reserves and credits the sellers account.

 

The Govt debt is an asset in which deposits are created.

The point is the Govt has to credit our accounts first before we have the money to purchase Government debt.

Your argument that this doesn't matter because eventually the nonbank public owns this debt so it is a wash is completely nonfactual and I have already proven it wrong.

 

It's not a lie at all. You just don't understand how it works. We're getting there though.

Virtually all Govt debt is purchased by the nonbank public. Look at any website as to holds the debt, including those I've cited.

No, you've claimed that dealers bought most of the $800 billion. I don't necessarily disagree. That doesn't mean they had the cash on hand, just like any other broker they have ready buyers. And it doesn't mean they hold it.

I've never said Govt spending does not create deposits.

The Fed did not buy that from the Govt.

I agree when the Fed buys assets of any kind, new reserves and deposits are created.

It is the Fed buying assets, and not the Govt incurring debt, that creates money.

If you don't see it, will take another look at your own example and do the transaction in reverse to see how Govt debt does not create money.

 

Don't be silly, you know I'm speaking in macro terms.

This is a logical fallacy, since I have proven that banks had over $800 billion in treasuries last year. That is $1.069 trillion of treasuries the Primary Dealers have had in the past year. That is over 10% of marketable treasuries existing. That means there is $1.069 trillion in deposits that were created from Government spending. That my friend means that not all Government spending is a wash as you claim.

I have shown this process 100 times. But the nonbank public needs the money first before it can purchase this debt. That is a critical piece to this entire puzzle

Account-wise, deficit spending does not exist in our system.

They don't get more deposits... they can create more deposits because they have more reserves. I'm saying the Fed does not increase M1 or M2 money supplies with their purchases because they don't actually give any one money. They give banks reserves.

The Fed does not create deposits. How many times do we have to go over this. And don't take my OP as authority. Take it from the Fed's mouth itself.

Is the Federal Reserve printing money in order to buy Treasury securities?

http://www.federalreserve.gov/faqs/money_12853.htm

 

We're going backwards!

You've agreed many times the Fed creates reserves. Shall I cite your posts?

 

If an only if the Fed buys it.

How does the Govt do that if it doesn't have any money? Where does it get the reserves to expend?

I'm still waiting for your citation to a source.

You've not proven me wrong at all. I've cited two different sources showing only a tiny portion of the debt is held by all banks.

When the nonbank public buys the Govt debt, its deposits decrease, right? That offsets the increase in deposits by Govt spending.

 

No one gives anyone any money to buy US debt.

Source and link.

This is the 4th or 5th time you've made this claim, and the 4th or 5th time I've asked for a link.

They have it because the Fed created it. The Fed creates reserves.

I have no idea what you are saying. Of course it does.

Reserves are money. A deposit is created when the Fed buys an assets and credits the seller's deposit account, thus increasing reserves and deposits in the system.

Sure it does. When you sell your T-bill thru a broker to the Fed, you get more $$ in your deposit account. You think you have to give it for free?

Review MMM step 1 and 2:

When the Federal Reserve Bank purchases government securities, bank reserves increase. This happens because the seller of the securities receives payment through a credit to a designated deposit account at a bank (Bank A) which the Federal Reserve effects by crediting the reserve account of Bank A.

Customer deposit.. +10,000

Is the Federal Reserve printing money in order to buy Treasury securities?
http://www.federalreserve.gov/faqs/money_12853.htm[/QUOTE]

That is all completely consistent with everything I've said.

 

http://www.newyorkfed.org/research/staff_reports/sr380.pdf

Chicken or the egg. It doesn't matter if the Fed created it first or second, the fact is the Government decides it wanted to spend money and it ended up with the creation of a deposit. The Government did not need the Fed to create money for them to use, the Fed has to create money so Government sending is usable.

The Fed doesn't buy assets outside of the banking system. It does not create any deposits as I have shown. Even if it did create deposits, hypothetically in an accounting sense it would still be dependent on the Govt going in to debt and the accounting would not change.

That is all completely consistent with everything I've said.[/QUOTE]

No it isn't. You have said that the Fed creates money. This is directly saying that they do not. They create reserves in which the banking system must hold on to. They are saying exactly what I'm saying... that reserves play no role in how much money the nonbank public has. We get this money before the Fed can manipulate the reserves to give banks the chance to create more deposits.

This completely contradicts what you have been saying.

And the Fed does not purchase treasuries from you or I. They deal specifically with the Primary Dealers.

 

False, someone has a deposit which is an asset to the depositor and someone has a treasury which is an asset to the holder. It creates assets regardless of the Fed buying it.

From the Fed. We have already gone over this.

It doesn't matter what portion is held by the banks. All that matters is that the nonbank public receives this money before they purchase the debt. Therefore the nonbank public does not FUND the Government. They simply use Government spending to save in the form of treasuries on the secondary market.

 

I don't want to wade thru the whole article. What it he text from that 2009 article proving the banks hold $1 trillion in US Govt debt today?

I agree it is chicken/egg. The important think is how money (reserves and deposits) are created and managed.

The key thing is, the Govt can't spend money it doesn't have, and whatever deposits it creates by spending is offset by deposits depleted by paying taxes or lending money by buying securities.

I agree it doesn't. Because practically speaking, there are a number of advantages to it buying US Govt debt.

If it bought gold, it would credit the gold seller's deposit account, transferring equivalent reserves to the bank. Why would that be dependent upon the Govt going into debt?

Remember what we've learned already: Reserves = cash = base money = high powered money = money.

With that in mind, let's look at the quote again:

Although Federal Reserve purchases of Treasury securities do not involve printing money, the increase in the Federal Reserve's holdings of Treasury securities is matched by a corresponding increase in reserve balances held by the banking system. The banking system must hold the quantity of reserve balances that the Federal Reserve creates. ​

That increase in reserve/cash/base money is creating money. They are just explaining that now days, the Fed doesn't actually print cash bills, but it creates reserves, which are the same thing.

The last sentence is what I've said all along too. The amount of reserves created by the Fed doesn't change by bank lending or other activities.

They're just brokers who act as intermediaries. It doesn't change anything.

 

This is false and you will not stop making this false claim, so I'm going to stop responding to this lie you keep on perpetuating.

You would buy gold with money that was already created.

No it is not. They are not talking about printing cash bills, they are talking about the process in which "printing money" is a term used in reference to financing the Govt spending. They are saying they are not creating any money, they are giving the banks reserves in which the banks have to hold on to them.

They are talking about the accounting angle to the process and saying that they are not actually giving anyone money to fund anything.

It is directly from their mouth. This transaction does not affect the M1 and M2 money supplies unless the banks create more deposits.