What Does Paul Ryan NOT Understand about Reserve Banking?

By J. D. Alt

It’s clear that Paul Ryan believes the Federal government uses money created by the U.S. banking industry for its sovereign spending. If this actually were the case, we’d be correct in believing that, like the rest of us, the Federal government has to EARN the dollars it spends—in its case, by collecting taxes, fines and fees—or it will have borrow them from someone who has more dollars than they need. There would also be some justification for Congressman Ryan’s fearful belief that the Federal government is spending a whole lot more dollars than it “earns” and, as a result, is having to borrow way more dollars that it can ever pay back.

In truth, however, the Federal government does NOT use money created by U.S. banks—it is the other way around:  U.S. banks have accounts at the Federal Reserve which they use to leverage money created by the Federal government. And this operational relationship leads inexorably to three apparent realities that Congressman Ryan would do well to consider and understand before he succeeds in leading our nation into poverty.

Reality No. 1:  The U.S. economy uses TWO kinds of primary money.

This reality can be clearly observed by watching carefully what happens when the Federal government spends. Let’s say the government buys $100 worth of Medicare services from Dr. X. If you look casually at this transaction, it appears that the U.S. Treasury makes an electronic payment into Dr. X’s account at Chase Bank and, just as we’d expect, the doctor’s Chase account increases by $100, and the Treasury’s account (at the Federal Reserve) decreases by $100. If you look a bit closer, however, you’ll see that something else happens as well: the Treasury simultaneously makes ANOTHER payment of $100—this one into the “reserve” account that Chase Bank is required to maintain at the Federal Reserve. Why does that happen? And why does it appear the Treasury has paid the $100 twice?

Let’s look at the transaction again in “slow motion”. What REALLY happens? (1) The Federal government purchases $100 worth of Medicare Services from Dr. X. (2) The Treasury moves 100 sovereign U.S. Dollars from its account at the Federal Reserve into Chase Bank’s account at the Federal Reserve. (3) The Treasury notifies Chase Bank the deposit has been made in its “reserve” account, and instructs Chase to issue 100 corresponding “bank dollars” and deposit them in Dr. X’s account, thus completing the transaction. We can see now that we’re operating with two “kinds” of money: sovereign money which is kept in Chase’s account at the Federal Reserve, and bank money which is kept in Dr. X’s account at Chase Bank. The characteristics and relationships of these two kinds of money explain several things which it appears Congressman Ryan is hopelessly confused about.

Sovereign money (U.S. currency denominated in dollars) can only be created by the Federal government. Before the Federal government chooses to create a sovereign dollar, it does not exist. Sovereign money is “fiat” money, which simply means it is created by declaration. The Federal government declares: “A U.S. sovereign dollar is hereby created,” and by that declaration the U.S. dollar comes into existence. There is no other mechanism for creating U.S. sovereign dollars. What is special about U.S. sovereign dollars is they are the ONLY money the Federal government will accept in payment for taxes, fines, and fees due to the Federal government.

Bank dollars are created in the same way: by declaration. Chase Bank simply declares that it is depositing $100 in Dr. X’s Chase account, and the 100 bank dollars appear in the account. But the bank dollars created by Chase Bank have an operationally crucial relationship to the sovereign dollars created by the Federal government: Bank dollars are, by law, CONVERTIBLE on demand to sovereign dollars. This is why people, like Dr. X, are perfectly happy to have bank dollars in their accounts—because they know that, any time they want, they can convert them to the “real thing.” (They do this every day by withdrawing cash from ATM machines: cash dollars are sovereign U.S. dollars.)

Reality No. 2:  Sovereign Dollars have to Pre-Exist bank dollars

The 100 sovereign dollars in Chase Bank’s “reserve” account, however, are not just “covering” the 100 bank dollars in Dr. X’s Chase account—Chase also “leverages” those reserve dollars by extending credit to other bank customers. Customer Y wants to buy a car, for example, and Chase Bank loans her $5,000 to make the purchase. After the loan agreement is signed, Chase once again simply key strokes 5,000 new bank dollars into customer Y’s Chase account. They are able “safely” to do this because they know that, under normal circumstances, only a small percentage of their bank dollars actually get converted to sovereign dollars; as long as they maintain that percentage of sovereign dollars in their “reserve” account, they’ll be able to fulfill their promises to make the conversion.

But rather than getting bogged down in the operational issues of bank “leveraging”, let’s focus on the key point we want Congressman Ryan to understand: If indeed it is true that the creation of bank money is, by law, dependent upon the existence sovereign money (i.e. is convertible, on demand, to sovereign money) this means, by logic, the sovereign money has to exist FIRST and then the bank money can be created. Since it can’t be the other way around, it is impossible to argue that the Federal government could ever be dependent upon collecting or borrowing dollars created by the U.S. banking system in order to pay for its sovereign spending.

Quite clearly the REVERSE is true: the U.S. banking system—and the private sector economy which is dependent upon it—requires the Federal government to issue its sovereign currency on a continuing basis in order for the banking system to be able to fulfill its promise of convertibility. And the only way the Federal government can pay sovereign dollars into the “reserve” accounts of the private banks is through Federal spending. In other words, the Federal government has to SPEND in order for the private banking system to have the “reserve” dollars it needs to leverage its bank dollars.

Reality No. 3:  The Federal government HAS to deficit spend.

The Federal government creates a “deficit” when it spends more sovereign dollars than it collects back in taxes. In Paul Ryan’s mind, the national “deficit” is symptomatic of a terrible flaw in the American character—a flaw he claims will lead our country to insolvency and bankruptcy. Applying the operations of the “reserve” banking system, however, it is easy to see how dangerously confused the congressman actually is. To see this, let’s go back and add a tax transaction to our simple example of the government’s buying Medicare services from Dr. X:

The Federal government has spent 100 sovereign dollars—transferring them to Chase Bank’s “reserve account”. These dollars are now available to fulfill Chase’s promise to convert its bank money to sovereign money. Chase creates 100 corresponding bank dollars and deposits them in Dr. X’s Chase account, concluding the government’s purchase. Now the government levies a tax on Dr. X. Let’s say the tax is 25% of income. Dr. X writes a check on his Chase account to the U.S. Treasury for $25. Those bank dollars are removed from Dr. X’s account, and a corresponding number of sovereign dollars are transferred from Chase’s “reserve” account to the Treasury’s account at the Federal Reserve—and Dr. X’s tax liability is extinguished.

As described above, the Federal government has just created a “deficit” of $75 (it spent 100 sovereign dollars and collected back 25 in taxes.) Let’s imagine those were the only Federal spending and taxing transactions that occurred in a given year. At years end, then, the government has a “deficit” of $75, Chase Bank has a “reserve” account containing 75 sovereign dollars, and Dr. X has a Chase account containing 75 bank dollars. Chase still has “reserves” to leverage for extending credit, and Dr. X still has bank dollars to pay for living expenses and investments.

Now let’s imagine that Congressman Ryan’s Holy Grail—a “balanced budget”—is achieved. This means the Federal government has to collect taxes EQUAL to its spending. It has paid Dr. X $100 dollars for Medicare services, and now it levies a tax on Dr. X for $100. Dr. X writes a check on his Chase account to the U.S. Treasury for $100. The dollars are subtracted from his Chase account, and 100 corresponding sovereign dollars are transferred from Chase’s “reserve” account to the Treasury’s account—and Dr. X’s tax liability is extinguished.

Again, if these were the only Federal spending and tax transactions for a given year, what are the year-end positions? The government’s deficit is zero. (Thank god we finally got spending under control!) Chase Bank’s “reserve” account is also zero—it now has to rely on “reserves” it built up in previous years in order to leverage its bank loans. Dr. X’s Chase account is also zero—he now has to dip into savings he built up in previous years to pay his living expenses and make investments. Even worse, he may have to borrow bank dollars from Chase Bank just to maintain the lifestyle he had created the year before—and to meet this new demand for borrowing, Chase Bank may begin to “stretch” the percentage of bank dollars it can safely leverage against its “reserves” which means at some point, if this continues, a “banking crisis” is inevitable: Chase is suddenly unable to fulfill its promise to convert bank dollars to sovereign currency. In other words, the Federal government HAS to deficit spend to keep the banking industry “safely” leveraged.

Clueless in Washington

We can summarize what Paul Ryan doesn’t understand about Reserve Banking in two sentences: (1) The entire U.S. economy is leveraged upon bank “reserves”. (2) The ONLY way bank “reserves” can be created is through deficit spending by the Federal government. The fact that Paul Ryan doesn’t understand these two realities is a big problem for the Republican party. The fact that Barak Obama apparently doesn’t understand them either is a tragedy for our country.

 

37 Responses to What Does Paul Ryan NOT Understand about Reserve Banking?

  1. “Barack”

  2. Congressman Ryan is not alone in his lack of understanding ( or pretending that he fails at knowing as a politically expedient stance to use the Federal Debt as a whipping post to tie the 99.5% to ); over 80% (I’m guessing) of adult Americans would not be willing or able to follow the clear and simple explanation given here regarding how our money system really works. Bad information has successfully driven out good information on this topic it would seem.

  3. Great article J.D! So good, in fact, I sent a tweet @RepPaulRyan with a link to it with hopes he or someone on his staff might read it.

  4. golfer1john

    J.D., a serious flaw in your article: banks can always borrow reserves from the Federal Reserve. Thus they are never “reserve-constrained” in making loans. Even if the Federal budget were balanced, or in surplus. It’s not obvious to me that this would leave banks leveraged “unsafely”. If you want to say that, then further explanation is required.

    Balancing the federal budget would leave the private sector in financial difficulty, and unsafely leveraged if they were to continue borrowing from banks. In that sense, when they owe the banks $100 and can’t pay, they’re in trouble, but when they owe $45T and can’t pay, the banks are in trouble.

    • golferjohn, Yes, that’s true, but they have to pay back what they borrow, right? On the other hand sovereign money deposited in their reserve account through government spending doesn’t have to be paid back.

  5. This is one of the best articles regarding banking that I can recall reading.

    Thank you!

    Sadly, Congressman Ryan is a mindless ideologue and as such, it’s questionable whether facts or empirical data have any impact on his alleged thinking.

  6. John Q. Public

    Great concise, short example explaining micro/macro money! When I try to explain my understanding of sector balances my friends eyes glaze over, and I get the stock answer: debt, deficits are bad! Bad for me, bad for business, bad for my country! This example is something even a dummy like me can understand and and better explain to my friends. Thanks!

  7. Taking your Doctor X example to fruition: say, the US government simply gave every American a dollar for dollar tax credit for their out of pocket medical expenses. I’ve seen the figure of 6% of GDP bandied about. Now let’s look at the affect on the economy. Would it cause hyperinflation? Those experiencing unbudgeted medical expenses would just be made whole. It would simply eliminate the drag on the economy. They aren’t going to be overly chasing goods and services anymore than they normally would. Healthcare providers wouldn’t see any difference, they are simply getting paid, either way. And the tax credits would be going directly to those who need it the most, not heavily concentrated on crony capitalists and the 1%. Immediately there would be a 6% increase in GDP. And since GDP is outpacing treasury bill interest rates, the increased deficit would still be decreasing over the long run. Oh, and the first word in the Declaration of Independence is “Life.” What’s the deal with making healthcare a profit center, with counterintuitive economic incentives, and as obtuse and regressive as humanly possible—while still keeping up appearances that we live in a civilized country? Maybe it’s because it employes a ton of people with good paying jobs. Now, that’s my kind of make work.

    Great post J.D. Cool initials, too.

  8. I am not completely clear what this article proves. You show two basic examples- one where there is not a deficit (i.e., when the government collects what it spends), and one where there is a deficit (where the government collects less than it spends). The case you are trying to make (I think) is that deficit spending by the government leads to more federal reserve dollars for lending, while deficit free spending leads to lack of funds for lending.

    Why do we need a federal reserve system? Why can’t the treasury just create its own bank, and deposit sovereign money in its own account, then allow private banks to use it as reserves? And please don’t tell me that the federal reserve is the government’s bank, because it is a private entity (with some limited government oversight).

    Let’s also allow for competing currencies. Chaotic at times, maybe, but at least we are not dictated to by a centralized group of private bankers as to what the cost of money will be, nor will we be at the mercy of their government supported derivatives bubble. http://www.revokethefed.com .

  9. Remember everyone that on the MMT picture, the term “government” refers to the consolidated government, which is the Treasury + Fed combined. In order for there to be a net increase in government liabilities held by the non-government sectors of economy, the consolidated government has to spend more than it receives. But in principle, the spending could be from the Fed. For example the Fed is constantly pumping dollars into the economy as it pays interest on reserves, and every time it purchases a financial asset from the private sector. Even if the Treasury were running a balanced budget, the consolidated government could be running a a deficit if the Fed is emitting more government liabilities than are being extinguished by payments to the Fed.

    The practical need for a Treasury deficit arises from the fact that a consolidated deficit due only and entirely to the Fed might only impact bank reserves without influencing the non-banking sectors of the economy. Bank reserves could be increasing due to a Fed “deficit” while bank lending is stagnant. The private sector as a whole could thus have a greater net stock of financial assets, because the banks are themselves part of the private sector. But the productive agents that we most need to increase their net financial assets – households and non-banking businesses – might be standing still and not accumulating financial assets. That’s the point of John’s Dr. X example. When the Treasury deficit spends, and the Fed accommodates by purchasing at least some of the Treasury’s debt, then not only are government liabilities to the banks’ (reserves) increased, but liabilities of the banks to the non-bank sector (in this case Dr. X) are also increased, whether or not banks expand their lending.

    • Actually, according to MMT Primer #2, “government” means the Federal Reserve, Federal Government, and all State, local, etc. governments, not just the Treasury and the Fed. Or does the term “government” have multiple meanings in MMT?

    • Auburn Parks

      Hey Dan
      Am I wrong in my logic here…..
      “For example the Fed is constantly pumping dollars into the economy as it pays interest on reserves, and every time it purchases a financial asset from the private sector.”
      Now, obviously the Fed is creating new money for the economy when it pays interest on reserves…..my problem arises when contemplating the variations in the mechanics of Fed asset purchases. Lets see if I can explain this in a coherent way (just got done having quite a few libations with some of my west coast family : ).
      The way I see it….we can break down Fed asset purchases of privately held securities into two categories:
      1. I have purchased a US treasury on the secondary market.
      2. I purchased my US treasury in the primary auction.
      In example 1, I already have the (lets use $1Million) money to buy the UST’s….so my already existing $1M is transferred to the previous private bond holder (all private sector ledger inputs net to zero) and when the Fed purchases this bond, they are trading me $1M new reserve dollars for my equivalent USTs (for simplicity’s sake, lets exclude interest from the example because that is obviously always new money). In this example, the private sector ledger is now increased by $1M reserve cash.

      In example #2, I already have the $1M to buy UST’s from the Treasury….but now my $1M is transferred to my securities = savings account at the Fed. So when the Fed “buys” my bond they are simply returning my already existing $1M to its previous reserve = cash form. In this second example, the Fed is never actually creating any new money, they are just swapping my assets. The private sector ledger is always the same….$1M (again, excluding the newly created interest)
      Dan, or anyone else for that matter, please let me know if the situation I described above makes sense….thanks in advance.

    • Auburn Parks

      Never mind….it just came to me. No matter how many private intermediaries a bond goes through, the accounting should work out the same in both examples above. The UST’s were always purchased with already existing money=reserves originally and as such, it doesn’t matter how many hands a UST passes through, the accounting transaction is always the same, securities for reserves or an asset swap, and the only thing that changes is whose asset gets swapped….almost like a game of hot potato.

      So with that said, I am completely wrong here or is your line about adding reserves via a Fed financial asset swap\purchase wrong?

      P.S. I am watching Stewart’s Daily show from yesterday on DVR and ‘oh my god’ is David Stockman a jerk-off douchebag.

      • Hi Auburn Parks,

        Sorry about the delay. If the Fed purchases financial assets of some kind, there is indeed a more-or-less 1-for-1 asset swap. But reserves are only one kind of financial asset. So if the Fed buys a $1 million dollar bond for $1 million, the net financial assets of the private sector are the same, but the private sector now has more reserves and fewer bonds.

        Whoever issued the bond has to pay the interest on it, and the principle at maturity. But now those payments go to the Fed instead of the former bond holder. As that process takes place over time, the reserves the Fed injected are drained.

        Make sense?

    • All fed can do is substitute assets already in place. If it substitutes financial assets, net financial assets of the private sector obviously don’t change. If it substitutes other kind of assets, like real estate property, net financial assets do change but net wealth of the private sector does not change, assuming these purchases do not cause real estate prices to appreciate.

      In end of the day, spending depends on wealth of the private sector, not amount of money in the private sector.

    • Excellent clarification Dan, thank you!

    • So Dan, you’re saying that if I have $100 in some form of financial asset and I exchange that with the FED for a different $100 financial asset I have somehow received an increase in financial assets?

  10. Unfortunately, I don’t think the author’s confidence is warranted. It’s funny how there’s still so much debate among economists about how money and banking actually work.

    Philip Pilkington makes the argument that the government has very little control over the money supply. He argues that the sector balance identity is actually a side effect of the Fed maintaining a target interest rate. Basically, when the government borrows a lot of money the Fed automatically monetizes debt in order to maintain the target rate.

    http://www.nakedcapitalism.com/2012/10/philip-pilkington-three-reasons-why-endogenous-money-matters.html

    In this next article John Carney explains how bank credit, reserve rates, and capital rates work. Once again this seems to dispute Mr. Alt’s argument that the money has to be spent into the economy by the government before it can exist. The bank only needs to meet capital and reserve requirements to make the loan. Additionally, the bank may make Dr. X’s payment with a simple accounting entry, the sovereign currency never having traded hands.

    http://www.cnbc.com/id/100497710

    I don’t see these contradictions as resolved. Maybe someone can explain to me why I’m wrong (or not).

  11. Notiony, there is money and there is money. The liabilities emitted by commercial banks held as assets by private sector households and businesses are one kind of money, since they are negotiable liabilities accepted by most people in the private sector for most payments and for the discharge of debts. And the liabilities of the government consisting of reserve balances and physical currency are another kind of money, negotiable liabilities accepted by banks among themselves for the discharge of interbank debt, and (in currency form) accepted by everybody.

    Commercial banks can emit more of their own liabilities without acquiring more government-issued liabilities first, although if they are not carrying sufficient reserves, they will have to acquire those government-issued liabilities soon afterward to be able to meet the additional interbank payment obligations that their emission of additional negotiable liabilities is likely to incur.

    But what does the government accept in payment of taxes. There is a misunderstanding afoot that the government accepts bank liabilities per se, and so you can pay your taxes with something that banks create ex nihilo. But that’s an incomplete picture. The government will accept a bank liability, but that’s only because it is a liability for the government’s liability. If I pay my taxes with a check drawn on my bank deposit account, I am paying with the bank’s liability. But ultimately the clearing of my payment to the Treasury general account will require a transfer of bank reserves to the TGA. (There will be a sort of way station, as the first stage is a credit to one of the Treasury’s many TTL accounts, which may or may not require a transfer of reserves between banks. But for the Treasury to spend it has to move balances from TTL accounts to the TGA, and so the reserve transfer takes place at that time.)

    If a commercial bank liability (bank money) were not a liability for the government’s liability, the government wouldn’t accept it for tax payment. For example, if some (rather unconventional and probably illegal) bank issued you an account consisting of a negotiable liability for pig feed, you might very well be able to use that account to discharge some debts. People might very well be willing to accept that kind of commodity money in payment for various things. But the government won’t accept it, because what the government wants is its own liability back. So it only accepts bank liabilities of the standard sort that are liabilities for the government’s liabilities, so when the payment obligations are all cleared, the government has succeeding in draining some of the very same liabilities that it previously issued. This is the sense in which the government has to issue its liabilities first before anyone can receive them back in taxes.

  12. This is just an idle thought, but one would think that the party of creationism should be comfortable with the fact that dollars/money have to be created from somewhere.

  13. But Ryan doesn’t have to understand it. All he has to do is get a majority of people to either believe he is mostly right or be so unsure that he might be right, enough to keep America from real growth for another five or ten years.

  14. Judging by the level of indifference and ignorance pervading this society, cluelessness is not only the vice of Washington D.C.

  15. In Paul Ryan’s ideal world he and all his neighbors would take out bank loans to build a community sewage plant and those who didn’t would have to stick with their cesspit holes in the ground.

  16. What is not explained in this article is why the US Treasury has to go into debt in order to create sovereign money and also has to pay interest on this debt. If the Federal Reserve is a US government entity, then there is no need for debt. The government could just create money debt and interest free. But it does not.

    • Alan Greenspan explains that the Federal Reserve is an independent agency not subject to interference by any other branch of government. The term “independent agency” is actually an oxymoron, because for there to be an agent there has to be a principal.

      http://www.youtube.com/watch?v=-w4AUAdN12c

      Thus the Federal Reserve system is not part of the US government and not subject to any control by Congress nor the President. It was created by an Act of Congress in 1913, which gave it the right to control the money supply of the United States. The US money supply is in private hands. The US Treasury does not create money; it has to borrow it from the private sector by issuing US Treasury bonds, which bear interest.

  17. Is the preexistence of reserves the correct description. In some cases loans surely preceeds reserves. No?

    • I would agree with that. The loans – and creation of new commercial bank liabilities to their customers – can come before and addition of reserves. If those additional bank liabilities create a net need for the banking system to carry more reserves, the additional reserves can be acquired in the weeks to come.

      And of course, the banks might not have to acquire any additional reserves at all. If the banking system in the aggregate is carrying excess reserves, then individual banks can acquire any additional reserves as needed from the interbank market.

  18. My understanding was that banks create money (deposits) first, and their reserve accounts are automatically covered with a Fed overdraft. Afterwards, the banks will go out on the interbank market and borrow whatever reserves are necessary to meet the ratio requirement. Of course right now the banks are swimming in excess reserves so it doesn’t really matter, but at least in principle the banks can lend out the money and find the reserves afterwards..

    • I think that’s all basically right. But of course a bank would prefer not to be overdrawn at the Fed, because they pay a penalty rate for the automatic overdraft.

      As far as reserve requirements go, there is a calculation period, followed by a compliance period giving them sevel weeks to meet the requirement. The lengths of those periods can be and have been adjusted by the Fed in thepast.

  19. @Dan Reply subsequent comments:

    “…….In order for there to be a net increase in government liabilities held by the non-government sectors of economy, the consolidated government has to spend more than it receives. But in principle, the spending could be from the Fed. For example the Fed is constantly pumping dollars into the economy as it pays interest on reserves, and every time it purchases a financial asset from the private sector. ”

    I believe that most of the Fed dollars are used for purchasing Fae Mae/Freddie Mac secured loan portfolios.
    My questions are: How do we know if the private Banks are using their pumped-in dollars to make customer loans and not just turning around with their new dollars and buying another mortgage portfolio or using it for derivative bet?

    Does the Fed keep track of its pumped money to determine if the Banks have increased their lending?

    Is Fed just hoping that US economy will have a bigger rise in new home loan borrowings?

    Does Fed have a targeted percentage of new home loan business that will happen from their pumped-in dollars?

    Who watches the Fed to see if any of those possible goals do happen?

  20. And the difference between these fiat dollars and, say, confederate dollars … and other fiat currencies that have failed is what?

  21. Let me see if I understand. You state “Chase Bank simply declares that it is depositing $100 in Dr. X’s Chase account, and the 100 bank dollars appear in the account.” Chase Bank can do this regardless of whether Chase Bank actually has the funds? They could have put $100 into Dr. X’s account even if the Treasury didn’t pay $100 to Chase Bank?

    You then state that Chase Bank “leverages” its reserve dollars by extending credit and making loans. So again, does this mean that Chase Bank can lend money it doesn’t have so long as too many borrowers don’t ask for sovereign dollars?

    This isn’t anywhere near conventional descriptions of fractional reserve banking (which require that the bank have money deposited before it lends it). Are the textbooks lying to us? Can you point me to a textbook (or better a Federal Reserve Bank paper) which describes how the system really works.

    From what you’re saying it appears all I need to do is setup a reserve account with the Fed (say a million dollars) and then I can make loans for multiple millions (until reserve requirements are hit) without having to bother with pesky checking accounts, savings accounts, depositors, issuing bonds, etc.

    • The textbook authors probably aren’t lying. But their authors might be misinformed. This article by Scott Fullwiler contains the best overall description I know of the actual process:

      http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1658232

      When the bank loans money to borrowers, it usually sets up a demand deposit account for them and credits the loaned amount to that account. That account is a negotiable liability of the bank – an amount owed to the account holder. The depositor can demand the whole amount in cash whenever they want. They can also write checks on or electronic payments from the account. When they do this, the person they are paying might be a depositor at another bank. So to settle with that second bank, reserve funds from the first bank’s reserve account will have to be transferred to the second bank’s reserve account. Both the cash and the reserve balances are US government liabilities issued by the Fed. So while banks can make additional loans without getting additional USG liabilities first, they might need to acquire some more fairly soon in order to meet the additional obligations they have.

  22. Great stuff. Couple of questions:
    1. What’s the difference, if any, between the kind of spending you describe here and spending to conduct wars or to bail out banks?
    2. For the economy to grow at a reasonable clip (say 3%) how much would be needed to be added to the public debt (if you can call it that) on an annual basis?
    3. If tax revenues are not for the purpose of balancing the budget, what is their purpose. I think this was touched upon in an earlier post by someone.
    4. At the time there is such excess money created in the system that it does become inflationary, what is the method by which the government “unspends” to contract the money supply?

  23. What Paul Ryan does not understand about reserve banking,(or almost anything else for that matter), could fill a university universe. But that is not surprising, coming from an exceptional political clan that revels in ignorance, shuns diversity, assumes self serving competence in all matters and can brook no critical examination of itself. Furthermore, all others are in error and can be ignored. For these, the doGs have prepared hubris, for all others, when the moment comes, will be an exquisite revenge to haughty arrogance.

    Two roads are ahead. One has pitchforks and tar pots and lays in easy terrain. The other, longer and less traveled in difficult terrain, requires patience and the study of the geography and of the peoples who have established the track through the seeming wilderness. Whereas the second track has a known destination, a valley of plenty and gardens of wonder; the destination of the first is never given as it is unknowable and from which no traveler returns. The traveler cannot remain where they are, at their back is a gathering storm, torrential rains promise floods; damaging winds assure destruction of shelter; blazing lightening as terrible as war and darkness lays about like the end of days.

    At the temple aside the road the high priests roar at the gathering storm, imprecating salvation from their mercenary doG as soon as their vast coffers are filled with gold and gems. Invested in their brilliant cloaks of status and spotless repute, the high priests canticles and chants of salvation give the unwary traveler assurance and false comfort in choosing the least demanding of the roads ahead and most are taken in by the spectacle in the temple, but a few turn their backs upon the brazen sight and follow their insights instead, and thus arrive where bounty abounds.

    For most travelers upon this road have not the skills to navigate nor access to the libraries of knowledge needed in charting their destination, they are of the herd and those ahead must surely know the way. For these, the significance of the signposts, as they are passed, is lost, as if in an unknown language that had no bearing upon the journey or to prepare for the hardships ahead. Some will arrive but most will not arrive intact if at all. The bleating of the herd drown out the voice of caution, the warnings pass unheard; as it has for time immemorial.