* Federal Reserve Notes circulate as the currencySafe Haven | Is America Broke Part II -- The Debt God
* The currency is secured by Treasury Bonds
* Fractional Reserves are money required to be held by the bank
* The reserve requirements go from zero, to 3%, to 10% * Federal Reserve notes (cash) are the main reserve deposit
* The U.S. Treasury has an account at the Fed
* The Fed holds U.S. government securities in its accounts
* The Fed conducts open market operation by buying or selling Treasury securities Where the Money Comes FromTrillions of dollars are on deposit around the world. I remember as a kid that a million dollars was a big deal. Today, billions of dollars are tossed around without the blink of any eye. Trillions are now the topic de jour.
Where does all this money come from?
There are a couple of parts to the answer.The process begins with the Treasury Department creating a bond, which is now done electronically. Treasury bonds are debt obligations of the Federal government to repay a loan, which includes both the principle amount of the loan and the interest on the loan.
The Treasury sells bonds to the public and other buyers - Japan and China being the largest players, accounting for over 40% of our debt issue. The bonds not purchased by these buyers are deposited by the Treasury with the Federal Reserve. When the Fed accepts the bonds from the Treasury, it lists the bonds on its books as an asset.
The Fed assumes the government will make good on its promise to pay back the loan. This is based on the belief that the government's power to tax the people is sufficient collateral.Because the Fed now has an assetthat it didn't have before receiving the Treasury bond, the Fed can create a liability that is offset by its new asset. The liability that the Fed creates is a Federal Reserve check. It gives the Treasury the check in payment or in exchange for the Treasury Bonds.
The Fed loans the government money by purchasing Treasury Bonds.However, where did the Fed get the money to have deposited on account to cover this check, especially if one goes back to the beginning of the Federal Reserve and the creation of the first Federal Reserve Notes?Also, recall that Federal Reserve Notes are secured by Treasury Bonds - bonds that the Fed buys with the same Federal Reserve Notes the bonds secure. It sounds a bit circuitous to say the least.
The money was created by the very act of the Fed offering the Treasury a loan, and the Treasury accepting the loan. The Federal Reserve's check is endorsed by the Treasury and is deposited in one of the government's accounts. The government can then use the deposits to write checks against, to pay for government expenses.
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