This is an excellent question. Where does the money that the Government borrows come form? And the answer is: It comes from the Treasury and the Fed! And it cannot come from any other source. This is what so few people realize, perhaps because economists are too reluctant to explain.Quora
Andrea Terzi's answer to: "The US government currently owes about $14.2 Trillion. Who did we borrow that money from, and how did those financiers get that money?"
Andrea Terzi, Monetary economist
Another point that “few people realize” is that about 95% of the money in circulation originates with private banks, not with governments or central banks. Private bank created money is not quite the same as central bank money, but they both fit the standard definiton of the word “money”.
ReplyDeleteRight, Ralph, but the auctions for Treasuries (Treasury liabilities) settle in bank reserves, which are Fed liabilities.
ReplyDeleteBank created money is a promise to settle in cash or reserves as required. So if a bank customer wishes to up purchase tsys, the bank has to obtain reserves to settle in the bond market either through excess reserves it holds or by borrowing from other banks in the overnight market, the money market, or the Fed in order to complete the transaction for the customer, even if the banks gives the customer a loan thereby creating a deposit to purchase the bonds.
To Ralph's point, I'd state it even more strongly. Private bank created money is the same as central bank money. Because the central bank said it is.
ReplyDeleteKind of like the Sheriff deputizing a posse, if the central bank decides to pin a star to your chest by monetizing your liabilities, your liabilities are (state) money.
The money-ness of those deputized liabilities is just as certain as say, the money-ness of treasury securities. Interchangeable with state money because the state's issuer says they are.
@ geerussell
ReplyDeleteUntil final settlement after all netting, which is in either cash or rb.
Tom,
ReplyDeleteYes, absolutely. The two points are complimentary. All final settlement is in cb reserves. When the cb chooses to monetize a privately-issued liability with a promise to provide reserves on demand for it, the power to create reserves is effectively extended to that private issuer making it quite the same as central bank money (as long as the cb wants it to be).
Yes, that's the point. Without the cb playing the role of lender of last resort, then banks are constrained in depost creation by availability of rb to clear.
ReplyDelete