7/31    How does the US government make up for its budget deficit?
        Does it print the money or does it borrow money?  If borrow
        money, how does it do it?  Is it through what they call
        "treasury notes"?  And how does that relate to the "Fed
        interest rate" used for stimulating/cooling the economy?
        Is it possible that there would not be enough interest in
        the "treaury notes or whatever" due to interest rate
        being too low such that the government is forced to raise
        the rates to finance its budget deficit?
        \_ The US government borrows money from the treasuries market, yes.
           There is no direct relation between the Fed overnight rate
           and the bond rate. Government demand for borrowed money
           pushes up interest rates.
           \_ When people buy trearuries, where does the money go?
              Does the Fed just keep the money in a vault, or does
              the government spend it?  I guess my question is when
              there is a budget deficit, where does the government
              get the extra money?  Do they have some kind of reserve
              (federal reserve?) or need to make bond offerings
              (treasuries?)?
              \_ Don't confuse The Fed (a bank) with the Federal Government.
                 The federal government borrows money by issuing bonds. I
                 don't know how else to explain it. It is different than
                 just printing money because they promise to repay bonds.
                 A lot of the money used to finance US government deficit
                 spending comes from overseas investors.

                 \_ Is the Fed just like a regular bank?  Say, can I open a
                    savings or checking account at the Fed?
                 \_ Thanks, things are clearer now.  Are there no
                    connection at all between the the Fed and the Federal
                    Government?  There is never any money transfers
                    between the two entities?  Also, does the Fed only
                    lend out money?  Does it ever borrow money?
                    Where does it get all the money?  Is it in charge
                    of printing money?  It only lends to banks and
                    never directly to companies or individuals, right?
                    \_ This is way too much to answer in the motd.
                       http://www.federalreserve.gov/pf/pf.htm
                       \_ useful!
           \_ Is the link like, since the fed rate is so low, I have
              to put my money somewhere else, like bonds and stocks,
              so that causes bond rates to drop and stock market to
              go up.  Is that how the fed rate is supposed to affect
              the economy?
              \_ That is part of it. Another part is that since The Fed
                 is lending money at such a cheap rate to banks, they
                 are encouraged to lower their rates on things like
                 car and home mortgages. Since the money is so cheap
                 for the banks, they can lower their rates and still
                 make a profit. They can't lower them too far though,
                 since they are taking on the risk that rates will go
                 up in the future and they will be stuck with a crappy
                 rate.
                 \- um it's not possible to address all of the issues
                    in here except maybe give references. but quickly:
                    1. the treasury doesnt do much. they write the checks
                       but dont manage the money. they are a instrumental
                       player in fiscal policy. most of the churn in treasury
                       instruments is turn over in debt obligations [paying
                       off one matruing instruments and selling to someone
                       [mostly likely a bank] who wants to buy one. most of
                       the volume is not to fianance deficit spending.
                    2. the fed matters. they are the govt's bank and
                       the czar of the overall money supply/money base.
                       they are the main players in monetary policy.
                       the main way they control the money supply are
                       open markey operations run by the trading desk
                       at the new york fed. they can also affect money
                       supply by banking reg changes like reserve requirements
                       but that is really a sledgehammer and rately done.
                       the treasury also keeps money with the fed [the fed
                       has a hell of a lot more money at the ny fed than
                       fort knox ... probably something very few people knew
                       until whatever diehard movie that mentioned this].
                       a lot of money is created by fiat rather than
                       actually creating federal reserve notes or treasury
                       coins.
                     3. as in the above case about trade balance it is best to
                        start with accounting identities and defns to under-
                        stand the fundametnals. the govt can fiance a deficit
                        by raising taxes, selling assets or borowing from
                        private sources, foreign sources, or from the fed.
                        [note: raiting taxes != raising tax rates ... we
                        survive debt and deficits in part by GDP growth]
                                --psb