According to conventional wisdom, the federal government spends taxpayers' money. In fact, it creates all the money spent, and continues with the fees and sales of securities. In the long run, however, must spend at least how it goes. Otherwise, it would clearly support the claim monetary base money, which is the main part of the money, in which the economy works. To influence the amount of money credit issued by banks, the government should check the cost for banks to obtain the monetary base.
Management of the supply of base money
The Treasury pays the bills on behalf of the Government of the Federal Reserve These payments will inject new reserves of base money in the banking system. Since the increase in stocks may hamper the ability of the Fed to implement monetary policy, the Ministry of Finance as follows:
- That the government spends to rebuild Fed with regard to transfers from the equality of commercial bank deposit accounts where the revenue from taxes and sales of securities. This eliminates the stock of base money created by its costs. total reserves of the banking system are the same, on average, allowing the Fed to make small changes to the reserves necessary to maintain control of the federal funds rate.
- The Treasury fills their bank accounts in commercial revenue from taxes and selling bonds when there is a reduction in tax revenue. If tax revenues exceed the costs, the excess of net redemptions of securities. In this way, minimizes the interruption of all bank deposits in the private sector.
Balanced mutual funds flow
In fact, the Treasury recycles money base created by the Fed last year. entrances and exits to move bank deposits and reserves in the banking system without changing the overall average. The Treasury does not need others in their bank account, beyond what is necessary to cover payments in the short term. Normally it takes the value of public spending nearly a month, now average about $ 300 billion.
The increase in long-term supply of public money because of (1) net borrowing from banks and (2) the growing demand for the currency. The money supply growth, the Fed injected reserves into the banking system for the balance of supply over demand for direct federal funds rate, the main instrument of monetary policy. This is accomplished with the purchase of government bonds held by the public.
Because the government can always sell the securities
Until the federal government strengthens tax collection, the base currency will be in demand. Since the base currency earns no interest, when the private sector has more of what everyone wants to take the only alternative is the net interest on Treasury bills. The Ministry of Finance may pay this interest to market demands, then there will always be buyers of securities.
