Depositing money in the bank...
When you deposit money at the bank (say the $1,000 mentioned by many) the bank does NOT store all of your "dollar bills" in the safety deposit box. Nor do they keep all of the $1,000 on hand. (And unlike Jimmy Stewarts "Building & Loan" company in
"It's a Wonderful Life" the bank does NOT just borrow it to your neighbor... there are LOTS of steps in between.)
Banking Reserves
Depending on the TYPE of account you deposited it into, the bank is required to keep a certain percentage of it "ON RESERVE" (typically between 10% to 20% -- more for "Demand Deposit Accounts (aka checking accounts) and less for term savings accounts -- {BTW, "CD's" so called "Money Market Accounts" and other things like "Repurchase Agreements" are slightly different creatures that are beyond basic discussions like this}.
Now what that "RESERVE" actually means is also NOT that they have to keep that 10% (or 20%) in actual dollar bills (FRN's) in the safe either... nope. (Years ago, it DID simply mean that they kept a % of GOLD COIN in the vault... but that all changed when the Government confiscated the gold and then implemented the FDIC, etc).
What that phrase "reserve" means TODAY is that the bank is required to keep (in aggregate) a percentage of that money in assets or more likely "securities" on deposit at one of the "Federal Reserve Banks" -- and this is typically done in the form of proportional ownership of "Treasury-Securities" (also called "T-Bills" or "T-Notes" or "T-Bonds" and other things as well). These are all essentially a form of debt-obligation -- similar to a "US Savings Bond" or a "Municipal Bond."
So, what exactly is a "Bond"?
In essence a "bond" it is a fancy form of a "post-dated check" -- a "promise to repay" or if you want it even simpler, an I.O.U. -- you hand over "cash" and the entity issuing the bond (say your local township) promises to pay the bondholder interest (either annually or in a lump sum at the end when it repays the balance). Now in the case of your local township -- let's say that they issued the bonds (les say 20 years bonds) to build a new courthouse. They "sell" the bonds to people who give them the money. Then they SPEND that money to build the courthouse. The over the 20 years, they pay people interest (and probably a portion of the principal) every year until it is paid off. Where does the township get the money? Where else... TAXES.
(So in the end a municipal bond is just a way of spending FUTURE tax money NOW.)
Back to Treasury Securities...
OK, so "Treasury Securities" are similar to bonds... but BIGGER denominations, issued by the U.S. Government, and done on a pretty regular basis, and "bought" by your local banks (and others, including foreign governments) via the Federal Reserve Banking system from the U.S. Treasury department at "auctions" that are virtually continuously taking place.
Now, each of those types of "Treasury Securities" is a distinct type. "Treasury Bills" aka T-Bills, mature in a year or less (i.e. they get "paid off" in 13, 26 or 52 weeks). "Treasury Notes" or T-Notes mature in 10 years or less, and "Treasury Bonds" mature within a timespan of 10 to 30 years. {There is actually a fourth type, called a TIPS, but again for the sake of simplicity we will ignore that one}. And since they all mature at different times, they have (or receive) different interest rates -- basically by being sold at a "discount" -- in other words, the Treasury will "sell" a 1 Million dollar 26-week T-Bill at auction, and will receive say $980,000 for it, which is a 4% interest rate.
26 weeks (or 2 years or 20 years) from now, they will have to sell ANOTHER bond and use THAT cash to pay back the "guy" who bought the previous T-Bill... plus they will probably sell yet another one... etc, and 26 weeks later... an endless cycle, ad infinitum.
What is important to note about these is that they are all DEBT of one type or another... and in practice they are virtually NEVER actually paid off. (Think of the average person who never actually pays off a car... just trading it in for a new one every few years, and rolling over the balance from one car loan to the next... Or the people who make "minimum payments" on credit cards, constantly getting NEW cards and rolling balances over to each new card in turn... that is {in essence} what the government does with Treasury "Securities" -- with the balance {and the the total interest due} growing larger and larger all the time).
OK, got all of that?
CONGRESS increases the debt... and creates inflation
Now, let's say Congress authorizes the Government to increase this year's "deficit" by say another Billion dollars or some such... what happens is that the U.S. Treasury prints up a bunch of "Treasury Securities" that are then "auctioned" (as for example our 1 Million T-Bill that went for $980,000 -- the 4% interest job).
Once "sold", the Treasury then "deposits" that $980K in the accounts of the Federal Government (in a Federal Reserve Bank) and proceeds to spend it, loan it, etc. In one way or another this money has been "spent" by the government, and has entered the economy.
MOST of the time, this is all done (just as majority of your own banking) by "pushing numbers" around from one account to another inside computer systems, without ever actually having any "money" (in the form of dollar bills and such) ever exchange hands.
T-Bills as ASSETS ! (?)
But it is important to note that the "T-Bill" is STILL considered to be valuable -- it is NOT treated as some "worthless I.O.U." -- nope. It takes the PLACE of an "asset" in the banking system, and as an "asset" it gets borrowed against.
Back to your local bank -- and remember that "reserve" that your bank is required to keep "on deposit" with the Federal Reserve Banking system? Remember that the PREFERRED for that is an "asset" in the form of a "Treasury Security"? That's right, though there are several steps in between that "aggregate" the money from lots of local banks, in essence your deposit has been "loaned" to the government and then "magically transformed" into a "T-Bill" and serves as the wonderful "reserve" that is used to "back" your deposits.
But banks need FRN's... so where do they come from???
Actually banks need a lot fewer of these on hand than you think (what % of your monthly transactions are done in actual cash?) -- but granted they DO need to keep a certain amount of what the public THINKS is "money" hanging around -- in part because local businesses NEED to have a movable currency for small-change transactions, but also to make certain the great mob of the riff-raff doesn't start to "panic" and then cause riots! (The people ARE "revolting" you know.
)
So what happens is that your local banks can then "borrow" against their reserve assets -- and get dollar bills and coins for their vault. And since the aggregate total of FRN's & coin that are kept in their local "vaults" are in fact qualified as still being part of their "reserves" -- so they get to have their "cake" AND "eat it" at essentially the same time. (And in practice, a lot of banks keep MORE than their "minimum required reserve" in the form of T-Bills, etc with their Fed branch.)
In the meantime... the OTHER $800..$900
Of course, in the meantime, the bank is free to lend out the other 80 to 90% of your "deposited" money -- and they do, just not in the way that you think. You see, as I said above unlike in the movie
"It's a Wonderful Life" other than some brief "construction loans" your local bank does NOT really do residential mortgages anymore... (THAT is another whole subject!).
Instead most of what your local bank does is a variety of short-term loans, commercial "construction" loans, initial "inventory loans" and a lot of "line-of-credit" stuff with local business-people. PLUS, they make a bunch of money on FEES and other things working as "middleman" in SELLING you a variety of things... including debt (Mortgages, VISA and MC Credit Cards & Debit Cards) and so called "assets" or "securities" (IRA's, CD's, Money Market Accounts, Repurchase Agreements, Bonds, etc).
And YES, the money loaned out in this way DOES come "back" into the local banks and get "multiplied" several times over -- what is known as "money creation" via the "money multiplier" -- and in MANY senses this IS a form of "fraud" -- but that is the result of "Fractional Reserve Banking" and NOT merely a consequence of the Fed/Treasury and "fiat money" beyond the scope of what I'm describing here (and I've already written extensive posts on it, see here:
http://www.ronpaulforums.com/showpos...98&postcount=3)
So, do your little Checking and Savings Deposits matter?
To the local branch of CitiBank... meh, not really... they do NOT make much money from people's personal savings anymore (how could they, most Americans DON'T HAVE "savings" accounts anymore) ...instead, they are viewed as "loss leader" services similar to the way stores use "on sale" items -- mainly as a way of creating "traffic" and getting you to come to them for things that they DO make money on. (Plus, if they can rip you for some check bouncing fees, get you to use their "brand" of credit cards, etc.)
However, it IS likely that your checking and savings matter a bit more to the smaller state-charted "Community Banks", as well as to local state-chartered "Savings Banks" (used to be called Savings & Loans before the late 80's S&L fiasco), and of course local they matter to local "Credit Unions" (which are run more as a "cooperative" than a business -- cf
http://en.wikipedia.org/wiki/Cooperative ).
The BIG banks DO make money off of small folks, but only in "volume" -- hence they really don't treat you well, because there's always another one born a few minutes later... And beyond that the Bigger banks are mainly focused on the medium-term commercial services -- again businesses, etc. And handling a variety of larger-dollar accounts like union pensions, etc.
Conclusion...
The long and short of it is that "money is always in motion" -- if it "sits" somewhere then it is VERY likely that the money itself really is NOT sitting there -- instead there is some form of I.O.U. in it's place. (Heck, what most people THINK is money... those "Federal Reserve Notes" are really nothing more than an I.O.U. themselves.)
In the end... all that exists are REAL ASSETS -- in the form of goods (foodstuffs, machinery, real estate, etc.) There are really only TWO ways the Government can POSSIBLY pay for anything:
1) is via SALES of REAL ASSETS that it "owns" (land, buildings, stored grains, etc) or subsequently seizes. {Note: Nos 3 & 5 below play into this... our loss of factories and foreign ownership of US Assets are a direct consequence of "inflated" dollars coming home to roost).
2) is via TAXATION (which means TAKING or SEIZING some portion of those REAL ASSETS -- foodstuffs, machinery, real estate, etc.) either now, gradually over time, or in some "distant" future. (What "Treasury Securities" are is just a way of pushing the day of that "TAXING" into the future, of {hopefully} doing the taxing gradually rather than all at once, and yet spending it HERE and NOW instead of waiting.)
Oh, there ARE three other alternatives...
3) Hyperinflation -- the government says: Here's a bunch of freshly printed paper currency -- bye bye! (Germany's Weimar Republic, Zimbabwe currently, etc.)
4) Bankruptcy -- the government simply says "sorry, we can't pay you" to the people who hold the "securities" (T-bills, T-Notes, T-bonds). THIS DOES happen with local governments (cities, towns, etc -- mainly because they CANNOT do #3 above). But for the US Government... well, since the dollar is the reserve currency, if its done all at once, it would be an "Apocolypse" type scenario. We pretty much DID do this under Nixon back in 1971... but the world "blinked" and went into denial, and allowed #5 instead...
5) More of the same -- "Hey, can't really pay you today, but tell you what, if you take this "new" I.O.U. we promise to pay you EVEN MORE next year." Repeat #5 ad infinitum. (Except, of course it cannot and will not last forever.)
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