IMF: U.S. Debt Very Concerning

[Pksimon2007]

- Confute?

Is that like "refudiate"?

dear, instead of being a perfect dummy look it up!!! Dah!!!

- I think you meant "conflate"

 

[EdwardBaiamonte]

- I think you meant "conflate"

dear, instead of being a perfect dummy look it up!!! Dah!

 

[Pksimon2007]

I can help you understand reserves, Edward. A friend of mine wrote a little description that I think lays it out well.

too stupid!! I laid it out perfectly in 20 words or so above. If you think its inaccurate please say exactly why or just admit to being a typical liberal.

- I can explain exactly why it's wrong, but nothing like the monetary system can be described in twenty words or less.

Read what I cited above. You need to understand what reserves are first, so that we can strip away some of the baloney mythology you believe.

Once that's done, and you're ready, I can walk you through exactly how federal spending creates money (and taxation destroys it).

But you have to understand interbank clearing for it to make sense, and you have to understand what reserves do to grasp it.

Read what Laura wrote. That gives you the foundation you need to understand how the system works.

 

[EdwardBaiamonte]

That is a myth believed by many economists, but it's completely false.

dear, well then its a myth believed by the economists at the Fed too! Here's how they have been doing their jobs for 100 years in their own language: Reserve requirements are the portions of deposits that banks must hold in cash, either in their vaults or on deposit at a Reserve Bank. A decrease in reserve requirements is expansionary because it increases the funds available in the banking system to lend to consumers and businesses.

 

[Pksimon2007]

When you or I write a check, that check is cleared by a "transfer" of reserves between your bank and mine. That transfer is executed by the Fed under payment systems operations. That's what reserves are for. To keep track of interbank payments.

Importantly, a transaction between private sector actors does not change the total quantity of bank balances (money) in the system, or of reserves. It just transfers ownership of them.

When the federal government writes a deficit check, there is no bank deposit anywhere in the system from which the money the government is spending can be taken.

As a result, when you deposit your government check, your bank creates a new bank deposit (money). And the Fed creates new reserves (bank deposits are a bank liability, reserves created by the central bank are an asset to your bank, so the system balances through balance sheet expansion).

That is how government spending creates money. It induces your bank to create a new bank deposit, and the Fed to create new reserves.

 

[Pksimon2007]

That is a myth believed by many economists, but it's completely false.

dear, well then its a myth believed by the economists at the Fed too! Here's how they have been doing their jobs for 100 years in their own language: Reserve requirements are the portions of deposits that banks must hold in cash, either in their vaults or on deposit at a Reserve Bank. A decrease in reserve requirements is expansionary because it increases the funds available in the banking system to lend to consumers and businesses.

- That's incorrect, and you're wrong that the Fed believes that.

Reserves are not "withheld" from deposits.

Read the blog I posted above, from Teller.

Reserves are not reserves in any rational meaning of the word.

In other countries they are called "settlement funds". They serve no reserve function at all.

 

[Pksimon2007]

That is a myth believed by many economists, but it's completely false.

dear, well then its a myth believed by the economists at the Fed too! Here's how they have been doing their jobs for 100 years in their own language: Reserve requirements are the portions of deposits that banks must hold in cash, either in their vaults or on deposit at a Reserve Bank. A decrease in reserve requirements is expansionary because it increases the funds available in the banking system to lend to consumers and businesses.

- I'll explain why there are reserve requirements in a bit. My son wants my attention for a moment.

 

[Pksimon2007]

That is a myth believed by many economists, but it's completely false.

dear, well then its a myth believed by the economists at the Fed too! Here's how they have been doing their jobs for 100 years in their own language: Reserve requirements are the portions of deposits that banks must hold in cash, either in their vaults or on deposit at a Reserve Bank. A decrease in reserve requirements is expansionary because it increases the funds available in the banking system to lend to consumers and businesses.

- Oh, and the system we have now hasn't "been there for 100 years".

It's been there since 1971.

 

[Pksimon2007]

That is a myth believed by many economists, but it's completely false.

dear, well then its a myth believed by the economists at the Fed too! Here's how they have been doing their jobs for 100 years in their own language: Reserve requirements are the portions of deposits that banks must hold in cash, either in their vaults or on deposit at a Reserve Bank. A decrease in reserve requirements is expansionary because it increases the funds available in the banking system to lend to consumers and businesses.

- Banks cannot and do not lend reserves. Reserves can only be used for interbank payments. Period.

They cannot withdraw them or lend them to customers, nor can they leverage them into loans.

And no, don't bother telling me the Fed believes this. I'm sure you can find some archaic verbiage somewhere on the Fed's website, written fifty years ago by an unpaid college intern, which says so.

It is not so.

 

[EdwardBaiamonte]

, It induces your bank to create a new bank deposit, and the Fed to create new reserves.

100% stupid of course. The Fed mandate is no inflation. So if they simply financed liberal deficits there would be huge inflation.

 

[Pksimon2007]

That is a myth believed by many economists, but it's completely false.

dear, well then its a myth believed by the economists at the Fed too! Here's how they have been doing their jobs for 100 years in their own language: Reserve requirements are the portions of deposits that banks must hold in cash, either in their vaults or on deposit at a Reserve Bank. A decrease in reserve requirements is expansionary because it increases the funds available in the banking system to lend to consumers and businesses.

- Banks cannot and do not lend reserves. Reserves can only be used for interbank payments. Period.

They cannot withdraw them or lend them to customers, nor can they leverage them into loans.

And no, don't bother telling me the Fed believes this. I'm sure you can find some archaic verbiage somewhere on the Fed's website, written fifty years ago by an unpaid college intern, which says so.

It is not so.

- That's another topic. Does that mean that you are now willing to accept what reserves are and how the system works, and that your argument is "okay, PK, you're right, but I think it's inflationary".

Is that your current position?

 

[EdwardBaiamonte]

That is a myth believed by many economists, but it's completely false.

dear, well then its a myth believed by the economists at the Fed too! Here's how they have been doing their jobs for 100 years in their own language: Reserve requirements are the portions of deposits that banks must hold in cash, either in their vaults or on deposit at a Reserve Bank. A decrease in reserve requirements is expansionary because it increases the funds available in the banking system to lend to consumers and businesses.

- Banks cannot and do not lend reserves. Reserves can only be used for interbank payments. Period.

They cannot withdraw them or lend them to customers, nor can they leverage them into loans.

And no, don't bother telling me the Fed believes this. I'm sure you can find some archaic verbiage somewhere on the Fed's website, written fifty years ago by an unpaid college intern, which says so.

It is not so.

- That's another topic. Does that mean that you are now willing to accept what reserves are and how the system works, and that your argument is "okay, PK, you're right, but I think it's inflationary".

Is that your current position?

i will agree that historically money has expanded slightly with deficits as the Fed has yielded to political presssure. For example, Chuck Schummer recently warned Bernanke "you're the only game in town" since Congress was gridlocked. But, lately the Fed has not yielded and inflation is not a problem. This is because deficits are financed by taking money out of the economy, not by adding money to the economy to cover the deficits.

Do you understand now??

 

[Pksimon2007]

That is a myth believed by many economists, but it's completely false.

dear, well then its a myth believed by the economists at the Fed too! Here's how they have been doing their jobs for 100 years in their own language: Reserve requirements are the portions of deposits that banks must hold in cash, either in their vaults or on deposit at a Reserve Bank. A decrease in reserve requirements is expansionary because it increases the funds available in the banking system to lend to consumers and businesses.

- Banks cannot and do not lend reserves. Reserves can only be used for interbank payments. Period.

They cannot withdraw them or lend them to customers, nor can they leverage them into loans.

And no, don't bother telling me the Fed believes this. I'm sure you can find some archaic verbiage somewhere on the Fed's website, written fifty years ago by an unpaid college intern, which says so.

It is not so.

- That's another topic. Does that mean that you are now willing to accept what reserves are and how the system works, and that your argument is "okay, PK, you're right, but I think it's inflationary".

Is that your current position?

i will agree that historically money has expanded slightly with deficits as the Fed has yielded to political presssure. For example, Chuck Schummer recently warned Bernanke "you're the only game in town" since Congress was gridlocked. But, lately the Fed has not yielded and inflation is not a problem. This is because deficits are financed by taking money out of the economy, not by adding money to the economy to cover the deficits.

Do you understand now??

- No, you're still wrong. Deficits don't take money out of the economy, they add to it.

Your fable sounds plausible on the surface, but it holds no water based on how the system really works.

Remember that government spending creates new bank deposits, and those are new money.

The Fed has a dual mandate, which really involves three goals: Low, stable inflation/financial stability, and reduce unemployment.

After trying multiple techniques, the Fed settled on the control of interest rates as their mechanism for the control of inflation.

The Fed has no authority to determine bank interest rates, so it has to influence them. It does this based on the theory of the term structure, which holds that loans of different maturities will evolve equal relative returns based on arbitrage, so that the time premium for loans of every maturity will even out so that they are equally profitable.

The Fed's theory is that by controlling one interest rate, they can influence them all. This is what reserve requirements do: they give the Fed a unique overnight loan market in which banks lend each other reserves, at a rate the Fed can control indirectly by controlling the availability of reserves.

Let's return now to the concept that federal spending creates new reserves. If your bank accepts the deposit of a federal check, it is awarded reserves in the full amount of that check - reserves which were just now created fresh by the Fed, reserves which did not exist until your bank accepted and cleared the deposit of the federal check.

That increase in reserves now creates excess reserves (your bank only needs 10% of those reserves to meed its reserve requirement), which will tend to push the fed funds rate (ffr) down. The Fed doesn't want that to happen, because their control of that interest rate is central to their control of ALL interest rates.

So the Fed needs a way to remove those reserves in order to prop up the ffr. It's technique is to allow banks to buy Treasuries with reserves.

When your bank buys Treasuries (that is when the government "borrows"), it swaps those newly created reserves for Treasuries. That gives the bank a little interest, rather than keeping excess reserves on hand, which pay zip. It gives the Fed a way to control interest rates, by sopping up excess reserves created by deficit spending.

But one thing is does NOT do is "crowd out investment", or "remove money from circulation". The circulating money created by deficit spending is the new deposit in your bank account. It was not used to buy a Treasury. The reserves that came with it were.

If the bank sells the Treasury to somebody else, that doesn't remove money from the system, either. It simply transfers ownership of money and ownership of the Treasury within the private sector.