My mental model is that the Fed lends money into existence (either to banks or to the treasury), which creates a loan (that eventually has to be paid back with interest, though I think they can choose not to collect on loans to the treasury?) (I’m also not sure where the money the Fed uses to pay interest on bank reserves comes from, but since it used to not do that I’ll ignore it and pretend I’m asking about the time before that existed).
This is true of the Fed’s operations in the repo market, but those are a fairly recent development and it’s not true in general.
In general, the Fed doesn’t lend money into existence, they create money from scratch and then sell that money in exchange for some other asset (typically Treasuries). A bank sells the Fed $1 worth of Treasuries, and the Fed just adds $1 to that bank’s account.
However, because the Fed buys a Treasury note/bond in this process, the (rest of the) government then owes the Fed money—i.e. the Treasury note/bond payments. So when the Fed issues a dollar, they also acquire one dollar’s worth of somebody else’s debt. Note that that’s one dollar’s worth of debt at current market prices; the Fed will actually be owed more than one dollar. Also, as current market prices shift and the Fed buys and sells assets the amount of money owed to the Fed will generally not be equal to the amount of dollars outstanding.
This suggests that it is not possible, economy-wide, for private sector net savings to increase unless the government debt increases, and that whenever government debt goes down, private savings must decrease.
Private investment is the main thing missing here. Private savings go into a mix of government debt and private capital investments (i.e. grid infrastructure, data infrastructure, railroads, oil wells, real estate, machinery, etc) - i.e. corporate bond/equity-financed capital expenditure. Thus the concern that too much government debt could (at least in theory) crowd out private investments in industry.
I think he meant savings as cash saving/bank deposits. Since all cash savings/bank deposits are the debt of someone else, for the entire private sector to increase its cash holding/bank deposits the government has to increase its debt.
Either definition could be used, as long as you keep track of what definition you’re using and the consequences that follow.
There’s a point of view called “Modern Monetary Theory” (MMT) which defines savings to exclude investments, resulting in Savings = 0 instead of the conventional Savings = Investment, but adherents of MMT tend to misapply this, arguing that government debt is needed for, e.g. people to be able to save for retirement, which is false when you take into account investment.
Yes, thanks, and that I think is the difference I was vaguely aiming toward. I was neglecting investment and real assets, and don’t quite know how they fit in (since you can’t spend them without selling them), so I did phrase my question in terms of cash and bank deposits.
Like—does our current monetary system allow for any possible way for both people and the government to not, on average, be in debt for more money than they have in cash and bank savings?
Who do you mean with people? If I have 1000$ bank saving that means that I loaned the bank 1000$ and the bank owns me those 1000$. Do you see banks and not being people? Do you see businesses as being people?
This is true of the Fed’s operations in the repo market, but those are a fairly recent development and it’s not true in general.
In general, the Fed doesn’t lend money into existence, they create money from scratch and then sell that money in exchange for some other asset (typically Treasuries). A bank sells the Fed $1 worth of Treasuries, and the Fed just adds $1 to that bank’s account.
However, because the Fed buys a Treasury note/bond in this process, the (rest of the) government then owes the Fed money—i.e. the Treasury note/bond payments. So when the Fed issues a dollar, they also acquire one dollar’s worth of somebody else’s debt. Note that that’s one dollar’s worth of debt at current market prices; the Fed will actually be owed more than one dollar. Also, as current market prices shift and the Fed buys and sells assets the amount of money owed to the Fed will generally not be equal to the amount of dollars outstanding.
Private investment is the main thing missing here. Private savings go into a mix of government debt and private capital investments (i.e. grid infrastructure, data infrastructure, railroads, oil wells, real estate, machinery, etc) - i.e. corporate bond/equity-financed capital expenditure. Thus the concern that too much government debt could (at least in theory) crowd out private investments in industry.
I think he meant savings as cash saving/bank deposits. Since all cash savings/bank deposits are the debt of someone else, for the entire private sector to increase its cash holding/bank deposits the government has to increase its debt.
Either definition could be used, as long as you keep track of what definition you’re using and the consequences that follow.
There’s a point of view called “Modern Monetary Theory” (MMT) which defines savings to exclude investments, resulting in Savings = 0 instead of the conventional Savings = Investment, but adherents of MMT tend to misapply this, arguing that government debt is needed for, e.g. people to be able to save for retirement, which is false when you take into account investment.
Yes, thanks, and that I think is the difference I was vaguely aiming toward. I was neglecting investment and real assets, and don’t quite know how they fit in (since you can’t spend them without selling them), so I did phrase my question in terms of cash and bank deposits.
Like—does our current monetary system allow for any possible way for both people and the government to not, on average, be in debt for more money than they have in cash and bank savings?
Who do you mean with people? If I have 1000$ bank saving that means that I loaned the bank 1000$ and the bank owns me those 1000$. Do you see banks and not being people? Do you see businesses as being people?