Comment: Yup....

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snickodonnell - Just to clarify, the type of money we are talking about here are currency reserves which are created by way of government spending. The federal government literally spends these reserves into existence. However, if the government spends more than it collects in tax revenue it's what we call a budget deficit and by federal law the Treasury must issue government debt to "cover" that deficit.

In connection with this, most people assume that the government must first tax the private sector and borrow if there is a deficit before they can spend the proceeds. Hence Ronald Reagan's political mantra about the TAX and SPEND Democrats, but in reality the causality is more like SPEND and TAX. The legal requirement for the US Treasury to issue debt to cover a federal budget deficit is a legacy from when the US dollar was still on a gold standard.

When the government spends reserves into existence the Fed credits a RESERVE ACCOUNT at a commercial bank. Conversely, when the government taxes and/or borrows from the private sector, the Fed debits a reserve account at a commercial bank. In other words, the Fed is literally EXTINGUISHING RESERVES when it debits a reserve account at a commercial bank. The big point to take in here is that the government doesn't really collect anything when it taxes and nor does it fund anything when it issues Treasury debt. All that is happening is that fiat currency reserves are being extinguished.

I can appreciate that this may sound preposterous, but consider what happens if you pay your tax bill or pay for a newly issued Treasury bond with folding Federal Reserve note cash that you carry around in your pocket. Upon receipt of your cash payment, the Treasury would simply shred it.

Ed Rombach