Wednesday, December 10, 2008

Treasury spends by crediting bank accounts. Says so right in the government's own manual!!

This is taken verbatim from the Fed's, Federal Reserve System Purposes and Functions manual. (Chapter 3, page 34.)

It reads:

"The Treasury is not a depository institution, so a payment by the Treasury to the public (for example, a Social Security payment) raises the volume of Federal Reserve balances available to depository institutions."

That says it all. If the Treasury were like a bank, that took our money and kept it on deposit to be used at some point down the road for its spending needs, then payments by the Treasury to us would result in NO NET CHANGE IN RESERVE BALANCES IN THE SYSTEM. However, it is clearly stated that the Treasury is NOT a despository institution and that payments made to the public result in a rise in reserve balances available to depository institutions.

I don't know how much more clear that can be.

Access the full manual here.


Jason said...

Congress and the President gave the Treasury Secretary exspansive authority to do what he thought was necessary. Although I think that they shouldn't be meddling in the former free market.

STF said...

Good find, Mike!

As I've said, this is all available in primary sources published by the Fed and/or the Tsy. It's not a "theory," it's how it actually works.


mike norman said...

The free market is a fallacy. All markets everywhere operate under some form of a political system and within societies where there are rules. Even if one aspect of a "free market" is regulated, influenced or controlled by anything, such as law, competitive advantage or monopolistic force or cartel, then all other transactions, prices and outputs are directly or indirectly influenced by that. Two good examples: interest rates, which are set by governments and oil prices and output, which is largely controlled by monopolistic forces. You need to grow up.

mike norman said...


Yes, it was your comment to me about this that made me go search for it.


STF said...

Hi Mike

Here's another good one on the Tsy's account and interactions with the Fed's open market operations, FYI. This is one of the more complete pieces I've seen on day-to-day Tsy cash mgmt. They don't see the larger paradigm, necessarily, but the operational details are there.

googleheim said...

To support the Norman :

1. Mad cow suspected in USDA beef > Japan prohibits imports. Japan is the # 1 importer of US beef. Result against the US Pricing : prices went UP. In free market, reduction in demand would mean higher prices. Now, the cattlemen cartel would have you eat crow instead right ?

2. Argentina and brazilan beef banned from USA > could have created greater competition for cleaner meat ... chemical and steriod companies would not have that happen right ?

3. brazilian sugar based ethanol to help out the Picken's energy plan.

4. Oil prices ( even Paul Krugman did not notice ) were a force of speculation and collusion. Saudi Arabia should be brought to court in the Bronx along with Mobil and all the suspects.

5. etc

Working for the clampdown?

I'm not working for the clampdown.