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

Maybe I misunderstood. I thought you were talking about someone buying a Govt Treasury.

Well that's the whole point! It's from the Fed. The Fed creates the money. Not the Govt. If the Govt doesn't have money it can't spend it.

It does matter because remember, when a nonbank public person buys a security, there is a decrease in deposits. That offsets the deposits created when the Govt spends.

If a bank buys a Govt security, only then is a deposit not reduced. Banks are the only entities that can spend (or lend) without reducing deposits.

The nonbank public funds they Govt because they ultimately pay for the debt.

Maybe we are really saying the same thing. I agree that in the macro view, Govt going into the Govt from the public (loans and taxes) balances out spending coming out of the Govt (spending) and it washes on both sides. The point is there is not money or deposits created in the process.

 

You are completely losing track of the accounting process that works throughout the system to create money and now you are just making false claims an assumptions because in your mind Government spending is a wash because the nonbank public ends up purchasing the debt.

Even though in reality the nonbank public does not end up purchasing all Government spending, and the nonbank publics accounts first have to increase before they can purchase the Government debt.

Let's get back to the accounting of each transaction and it will start to make sense. Even in your hypothetical example of the Fed purchasing directly from the nonbank public you can prove that it is still dependent on the Government going in to debt.

Everything needs to be explained through accounting to understand the system.

One can say that the Government (through the banking system) and the Fed create money. But my assertion is that the Fed creates money so that Government money can be used in the real economy.

 

That is the whole purpose of the OP. The Govt does not have the ability to create money to spend. So it has to go through an intermediary... which is the Primary Dealers. Which by law the Primary Dealers must bid on every auction and make sure every treasury is purchased.

So you can argue semantics and say that the money actually comes from the banking system... but in reality the Govt dictates how much money it wants the Primary Dealers to create in order to credit our accounts.

In reality it is the Government deciding on how much it wants to spend and who gets this money that determines how much money is credited in the form of deposits.

I've already gone over this. It still is dependent on the Govt going in to debt. We can show this through accounting. The significance is the nonbank public receives and increase in their deposits before they receive a decrease.

And the only reason they ultimately pay for the debt is because the money they have to pay the debt came from the debt itself.

There is a deposit created by every $ the Government spends. The fact that afterward there is a decrease does not mean the Government didn't create money.

People couldn't purchase all this debt if they didn't receive the money in the first place.

 

The economy isn't a closed system. Wealth is created and destroyed on the whim of their owner's and appraisers. The currency's value is only determined by those who use the currency. With the gold standard, you merely have the value pinned to the price of gold. It has no actual effect on the demand or supply of gold. This is why gold is chosen as a standard, because it's value is one of the most stable throughout history. Any commodity would work though, oil, silver, copper, platinum. Even in fiat money, or should I say especially in fiat money, do people cling to gold as a currency. Wealth is not created in a gold standard system "only" when gold is mined, it is created in the same way as in fiat money...when demands purchase a service or good. You can have wealth without currency, you can buy things without currency, always have. The difference with currency is that it allows you to trade with people who aren't willing to trade for anything you have. It makes trade easier.

The problem with the fiat money system is stability. For seemingly no reason at all, we unpinned our currency from a reliable meter of value. Suddenly we have no idea what tomorrow's dollar will be worth. Worse, since paper can be created out of thin air...we know that there is a good chance the dollar will be worth less tomorrow. Perhaps even worse, we are subject to taxation without representation. The Fed could theoretically tax all americans 100%, on not just their income, but their bank accounts, all they have to do is print a substantial amount of money. And they have been, for 40 years. Another problem is that value is harder to find. If I go to the gas station and suddenly the price is twice what I paid two weeks ago. My instinct is that I'm getting ripped off. When in fact, the dollars I'm using simply have devalued. If I had $1000 I just left in the bank in the past 10 years. I actually only have $500 now, because the dollar has inflated 90% in the past 10 years. And this inflation is going to increase in rate as the fed prints more money. In the next *5* years (2016) you dollars will be worth 25% what they were in 2001. In the next 10 (2021) years your dollars will be worth 1/16 what they were in 2001. If you haven't caught on yet, eventually the dollar is going to inflate 100% from the time you get money out of the atm to when you get to the store to actually buy your good.

This is why no country has ever lasted as the reserve currency for more than 43 years.

If we weren't the worlds reserve currency we wouldn't have this problem. Because we wouldn't be able to print money. The problem we would have is that whatever the reserve currency was, if it was fiat money, it would be inflating. If we weren't the reserve currency, and we printed money, it would cost an arm and a leg to trade with other countries because they wouldn't value our dollar at all.

 

I came upon this recent chart showing holders of the debt:

http://www.creditwritedowns.com/wp-content/uploads/2011/08/flow-of-funds-treasury-ownership.jpg

It shows that banks and broker/dealers only hold a very small part of the Govt debt.

Except the portion held by the Fed, the vast majority is held by the nonbank public. Thus, the deposits created by Govt spending are offset by the decrease in the nonbank's public payment of taxes or purchasing Govt debt, with no significant in crease in deposits.