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Comment: Bank money vs. reserves

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Bank money vs. reserves

Yes. Banks create what can be called bank money out of thin air by originating loans. Econ 101 states that loans create deposits. This bank money is self liquidating as loans are paid off and/or defaulted on. Under lagged reserve accounting rules, banks have about 30 days to come up with the reserves they need to place with the fed for the loans they have written. These reserves may come from deposits or bank capital but are usually borrowed in the fed funds market from other banks that have more reserves than they need. Note the difference between bank money and reserves. The Fed can temporarily reduce available reserves in the commercial banking system by selling Treasury securities from its balance sheet and the Treasury can extinguish reserves by way of tax collections and by selling newly issued Treasury bills, notes and bonds. Point is that conventional wisdom perceives that the government must first either tax and/or borrow before it can deficit spend, but in fact it spends non-stop 24/7 and then periodically taxes and/or borrows after the fact to extinguish reserves that might otherwise be inflationary if allowed to slosh around n the banking system. Of course most reserves are simply digital electronic in nature, while banks only hold enough paper federal notes to clear checks and cover anticipated cash withdrawals.

Ed Rombach