Comment: ok. we have a fiat money

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In reply to comment: Bill, I'm trying to wrap my (see in situ)

ok. we have a fiat money

ok. we have a fiat money system, which means the government is the monopoly supplier of the currency that everyone has to accept.

the govt also guarantees the payments system, so that you will never swipe at an atm or withdraw funds and be told "there's no money." the money has no intrinsic value. it's value comes from the law and because tax liabilities can only be discharged with US dollars/legal tender.

the govt never needs dollars, it never needs to tax or borrow. much of the structure of our monetary system is an artifact of the gold standard when gold was the base of the monetary pyramid.

things like the treasury bond market, the banking systems reserves, etc., are a hold over from when reserves were limited by the supply of gold and notes redeemable in gold. today they are not limited at all except by statute or policy decisions.

banks can never run out of reserves. reserves originally functioned to provide a stock of gold to meet demands for withdrawals or redemptions. they have no such purpose today, because the Fed will provide whatever reserves are required to meet the demands of the private banking system. if banks were "short" of reserves, the fed would just add reserves or lower reserve requirements, perhaps all the way to zero.

banks never look at their reserve level before issuing loans. loan officers evaluate credit worthiness of a potential borrower, and they make the loan (whether against collateral or otherwise). when the bank gives you a loan, you buy your house or car or whatever, and the recipient of those funds almost invariably deposits them in another federal reserve member... so that the loan creates an equal deposit. the banking system's balance sheet expands on both sides when credit expands. it is called double entry bookkeeping.

the new loan is balanced by a new deposit, an asset to the bank and a liability to the bank. this is sometimes referred to as horizontal money creation. no *net* financial assets have been created. the gross amount has gone up, but the liabilities offset the assets, the loan is equal to the deposit.

the only source of new *net* financial assets are provided in the form of treasuries, when the government runs a deficit. by law, when the govt adds money in excess of when it deletes (taxes), it must issue treasury securities equal to that amount. it must legally auction treasuries to match the size of the deficit.

treasuries aren't actually borrowing existing money. the money is created via the deficit, and that money is then "soaked up" by issuing treasuries. the govt spends first, then borrows what is spent. selling treasuries to the banking system is basically a reserve drain. if the govt spend 5 trillion for 2014, and did not sell any treasuries, then there would just be 5 trillion in new bank reserves after the spending ended up in bank accounts. the fed funds rate would collapse to zero. issuing the treasuries "mops up" or drains those reserves and exchanges them for treasuries.

selling treasuries is a reserve drain to hit an interest rate target, it is not borrowing money to fund govt operations. the creates the fiat tokens, it does not need to borrow them.

the government creates the us dollars, it is the sole provider of us dollars, it does not need to borrow them, and it does not need to tax them.

we don't have a FRB system. the banking system requires no reserves.

reserves served in the gold standard to meet the withdrawal demand for gold. there is no gold in our system. the banks merely need "vault cash" or dollar bills to meet atm and bank withdrawal demand. reserves are just a policy tool used to settle balances between banks ( clearing operations). their second function is to allow the Fed to hit a target rate for interbank borrowing.

but the amount of loans banks issue is never constrained by the amount of reserves in the system. does it really make sense to call a system fractional reserve, when reserves are intrinsically worthless tokens that will never hinder banking operations or impact lending decisions?

hope that helped a little.