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 |