Jan 31 (edited) • General discussion
Modern Money Transactions - When Reserves & Deposits Are And Are Not Created.
A. Tax and spend creates no new net reserves and no net new deposits.
Public paying taxes reduces public Assets
-Assets (-deposits)
Bank contracts BS making tax payments:
-Assets (-reserves)
-Liabilities (-deposits)
Fed facilitates bank payments to UST via Liability Swap:
-Liabilities (-reserves Treasury)
+Liabilities (+reserves receiving bank)
Treasury increases assets receiving taxes
+Assets (+reserves)
—-Treasury Spends—-
Treasury spending causes a reduction in UST Assets:
-Assets (-reserves)
Fed facilitates UST payments to banks via Liability Swap:
-Liabilities (-reserves Treasury)
+Liabilities (+reserves receiving bank)
Banks expand their BS when receiving Treasury payments on behalf of the public
+Assets (+reserves)
+Liabilities (+deposits)
Public receiving Gov payment increases Assets
+Assets (+deposits)
UST Tax and spend: -D -R +R -R +R +D = 0
Ravel will show the same.
—-
B. Deficit Spending creates no new net Reserves and no new net deposits when the new bonds are sold to the public.
Treasury expands their BS selling bonds:
+Assets (+reserves)
+Liabilities (Bonds)
Public does an asset swap buying bonds:
-Asset (-deposits)
+Assets (+bonds)
Bond buyer’s bank contracts their BS when their customers buy bonds:
-Assets (-reserves)
-Liabilities (-deposits)
—-Treasury Spends Bond Sale Proceeds—-
Treasury spending causes a reduction in UST Assets:
-Assets (-reserves)
Fed facilitates UST payments to banks via Liability Swap:
-Liabilities (-reserves Treasury)
+Liabilities (+reserves receiving bank)
Banks expand their BS when receiving Treasury payments on behalf of the public
+Assets (+reserves)
+Liabilities (+deposits)
Public receiving Gov payment increases Assets
+Assets (+deposits)
UST Borrow/Bond sale and deficit spend: -D -R +R +Bond -R +R +D = +B
No net new reserves or net new deposits, but public equity increases by receiving new deposits equal to the bond, and the Gov equity decreases by amount of bond.
Ravel will show the same.
——
C. Only when banks buy and hold the new bonds at UST auctions do deposits increase, which is 5% - 15% of the time.
Banks buying new bonds at auction complete an Asset Swap:
-Assets (-reserves)
+Assets (+reserves)
US Treasury expands their BS selling bonds:
+Assets (+reserves)
+Liabilities (+Bonds)
—-Treasury Spends Bond Sale Proceeds—-
Treasury spending causes a reduction in UST Assets:
-Assets (-reserves)
Fed facilitates UST payments to banks via Liability Swap:
-Liabilities (-reserves Treasury)
+Liabilities (+reserves receiving bank)
Banks expand their BS when receiving Treasury payments on behalf of the public
+Assets (+reserves)
+Liabilities (+deposits)
Public receiving Gov payment increases Assets
+Assets (+deposits)
Banks buying bonds UST deficit spending bond sale proceeds: -R + R +Bonds -R +R +D = +Bonds +D
Ravel will show the same..
——-
D. Reserve Creation
Fed buys Assets from banks by expanding the Fed’s Balance Sheet BS:
+Assets(High Quality Liquid Assets HQLA from banks)
+Liabilities (+reserves to banks)
Bank does an asset swap:
-Assets (-HQLA)
+Assets (+reserves)
Or
Fed creates new reserves when lending to banks, which also expands the Fed BS:
+Assets (loan secured by HQLA)
+Liabilities +reserves lent to bank)
Bank expands their BS borrowing from the Fed:
+Assets (+reserves)
+Liabilities (+Loan)
Conclusion:
- Reserve creation is 1:1 between banks and the Fed
- New bond sales are 1:1 between UST and the public
- Fed and Treasury do NOT transact to create new reserves (Fed Liabilities)
- Fed and Treasury do NOT transact to create new bonds (Treasury Liabilities)
- Deficit spending is financed by UST borrowing existing money from the public, (banks and non-banks), but deposits only
- increase when bank buy and hold new bonds from the UST, not when the non-bank public buys the bonds.
My sincere effort to show you the Double Entry Bookkeeping of modern money creation.
Please let me know if you have any questions.
1
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Modern Money Transactions - When Reserves & Deposits Are And Are Not Created.
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