create banks insoles (deposits) when they grant loans. And the borrowers pay back these loans with bank deposits. Almost all bank loans are repaid in this way, namely by charging bank deposits.
It is important to remember that the finances of a sovereign state are not comparable to those of households and companies.
Furthermore, it is essential not to forget that government spending is not regulated either by taxes or by the “bond market watchdogs” («Bond Watchers“) be restricted. States now act at the “push of a button” (“keystroke”) Expenditures they can never run out of.
But how do the banks get their reserves in the first place?
Consider that reserves are simply deposits created by the central bank, like L. Randall Wray in his new book knowledgeable and explained in detail.
Like one Privatbank Deposits (in favor of the borrower) create, when making a loan, the central bank creates reserves (in favor of the borrowing bank) if they have a Credit forgives.
Central banks create reserves when they own assets, such as B. Buy government bonds. Let’s think of them QE-Politics (“quantitative easing”).
After GFC 2008 started the Fed, the banks liquidity to prop up banks’ solvency in the face of increased demand for cash withdrawals.
The central bank lowered its target interest rate (Fed Funds Rate) to near zero, lending against questionable assets and buying trillions of dollars in assets, including not just government bonds (US-Treasury Bonds), but also private debt instruments such as mortgage-backed securities (MBS).
So the central bank can simply credit a borrowing bank’s reserves by holding the bank’s promissory notes.
In general plays the State the role of the main creditor, since most of its citizens owe taxes to the state. The real purpose of the tax was, for example, in the American colonies (before the revolution of 1776), which were still under British rule, to create demand for the bonds.
The function of bond sales, whether through new issuance by the Treasury Department or through open market sales by the central bank, is to lure the banks reserves to withdraw.
It is therefore a monetary policy measure, not a borrowing.
In fact, the banks must have the reserves before they can pay for the bonds since they pay for the bonds with their reserves at the central bank.
So the government needs to spend the reserves before selling the bonds, Prof. Wray goes on to say.
If the state spend reserves before he “borrows” them (sells bonds), then he does not need to borrow at all.
The sale of government bonds results in a withdrawal (debits) of the reserves and the purchase of bonds results in a credit (credits) of the reserves. Government spending generates income in the non-government sector; Taxes reduce income.
And if the bond vigilantes are on strike and refuse to lend to finance government spending, don’t worry, selling bonds isn’t really borrowing. The state cannot run out of its own money.
The state does not see itself under any financial constraints, but it does resource scarcity exposed.
Its total expenditure is determined by the aggregate demand of the private sector after the currency, eg for the payment of taxes, but also as a medium of exchange as well as a store of value.
