Sandia
Very Experienced
- Joined
- May 24, 2002
- Posts
- 6,461
All money exists in two forms: government money and commercial bank money.
Commercial bank money is all the money you have at the bank in the form of bank deposits. Government money consists of currency (dollar bills) and Federal Reserve deposits (also called federal funds).
The Fed requires banks to keep, at most, 10% of deposits in reserve: either in the form of currency or federal funds. The rest they're free to do with as they like.
Which means if everyone tried to withdraw all their money from banks, they'd be able to pay about 10 cents on the dollar.
Historically, when that happened it was called a bank run. Too many people would try to withdraw their money at once, and the banks would have to close their doors. The people who didn't get their money get their money first, lost out.
That hasn't happened in a long time, because of FDIC insurance, and because the Fed has consistently stepped in and saved private banks when they get into trouble.
Ordinary people can't get Fed accounts. You have to be a bank or a government to have an account at the Fed. Federal Reserve Notes (US currency) and federal funds, however, are interchangeable. (The only difference is that you can't get interest from currency. You can get interest from a reserve account - 0.25%, currently.)
The Fed can produce as many dollars as it chooses. It simply buys something - US Treasuries, for example - and credits the seller with dollars. The Fed then has an asset (the Treasuries) and a liability (dollars). The liability (dollars) is marked as a liability in the Fed's ledgers, but since dollars can only be redeemed with dollars, and the Fed can produce as many as it wants, it's only a liabilty in a strictly technical sense of the term.
It's not a liability the way your mortgage or student loans are, unless you have legal printing press, which you don't, because it's only legal for the Fed.
This why the US government can't run out of money. The Fed can always purchase, in whatever amount it chooses, whatever government debt is for sale. The Fed currently owns $2 or $3 trillion in government debt. But there's nothing sacred about that number. It can always buy more if it wants. Or it could choose to reduce its holdings. Those are policy choices it makes at its monthly meetings. But anyway, the point is that the Fed can't "run out of money"; anymore than its possible to run out out of numbers. There's a limited amount of labor in the world. A limited a amount of oil, of intelligence, of skills. But the amount of money the Fed can create is unlimited.
So when someone talks about the US not being able to pay its bills, or of running out of money, it's a sign they don't know what they're taking about.
There may be good policy reasons for funding one project more or less, or taxing more or less (in fact, the government could stop taxing people altogether, and still fund itself, if it wanted), but running out of money is never one of them.
Commercial bank money is all the money you have at the bank in the form of bank deposits. Government money consists of currency (dollar bills) and Federal Reserve deposits (also called federal funds).
The Fed requires banks to keep, at most, 10% of deposits in reserve: either in the form of currency or federal funds. The rest they're free to do with as they like.
Which means if everyone tried to withdraw all their money from banks, they'd be able to pay about 10 cents on the dollar.
Historically, when that happened it was called a bank run. Too many people would try to withdraw their money at once, and the banks would have to close their doors. The people who didn't get their money get their money first, lost out.
That hasn't happened in a long time, because of FDIC insurance, and because the Fed has consistently stepped in and saved private banks when they get into trouble.
Ordinary people can't get Fed accounts. You have to be a bank or a government to have an account at the Fed. Federal Reserve Notes (US currency) and federal funds, however, are interchangeable. (The only difference is that you can't get interest from currency. You can get interest from a reserve account - 0.25%, currently.)
The Fed can produce as many dollars as it chooses. It simply buys something - US Treasuries, for example - and credits the seller with dollars. The Fed then has an asset (the Treasuries) and a liability (dollars). The liability (dollars) is marked as a liability in the Fed's ledgers, but since dollars can only be redeemed with dollars, and the Fed can produce as many as it wants, it's only a liabilty in a strictly technical sense of the term.
It's not a liability the way your mortgage or student loans are, unless you have legal printing press, which you don't, because it's only legal for the Fed.
This why the US government can't run out of money. The Fed can always purchase, in whatever amount it chooses, whatever government debt is for sale. The Fed currently owns $2 or $3 trillion in government debt. But there's nothing sacred about that number. It can always buy more if it wants. Or it could choose to reduce its holdings. Those are policy choices it makes at its monthly meetings. But anyway, the point is that the Fed can't "run out of money"; anymore than its possible to run out out of numbers. There's a limited amount of labor in the world. A limited a amount of oil, of intelligence, of skills. But the amount of money the Fed can create is unlimited.
So when someone talks about the US not being able to pay its bills, or of running out of money, it's a sign they don't know what they're taking about.
There may be good policy reasons for funding one project more or less, or taxing more or less (in fact, the government could stop taxing people altogether, and still fund itself, if it wanted), but running out of money is never one of them.
