A government official wants money and asks the treasury to get some, so the treasury sells a government bond to the commercial banker for cash.
Now the commercial banker turns around and sells the bond to the central banker in exchange for a cheque that will add a few digits to the commercial banker's account at the central bank.
The commercial banker loans out 100% of those fresh digits to private business. That money circulates and each time it is deposited, 90% of it is embezzled, ultimately leading to a 10-to-1 expansion of credit.
That's the story as I understand it. Feel free to correct me if I am off track.
So here's my question: what happens to the bond when it matures? Does the central banker forgive the government official his debt? How about if the bond pays interest?
Does the Fed forgive government debt?
UsernamemanresU: A government official wants money and asks the treasury to get some, so the treasury sells a government bond to the commercial banker for cash. Now the commercial banker turns around and sells the bond to the central banker in exchange for a cheque that will add a few digits to the commercial banker's account at the central bank. The commercial banker loans out 100% of those fresh digits to private business. That money circulates and each time it is deposited, 90% of it is embezzled, ultimately leading to a 10-to-1 expansion of credit. That's the story as I understand it. Feel free to correct me if I am off track. So here's my question: what happens to the bond when it matures? Does the central banker forgive the government official his debt? How about if the bond pays interest?
When the bond matures is when the banks cash it in from the Fed for the money they are owed. These bonds do not count towards the reserve requirements since they are not fully liquid assets. To answer your other question, the central banker does not forgive government debt. All bonds pay interest in this form, since there would otherwise be no reason to hold them in a banks case.
Jonathan, thank you for the reply.
Would you mind helping me get this straight with a simple example? Is this what you are suggesting:
1. The banker buys a $1,000 T-bill from the treasury for $900 to mature in one year.
2. The banker sits on the T-bill for one year, then goes to the Fed, who then adds $1,000 to the banker's account for the matured T-bill (this being the point new money enters the "base of the pyramid").
This confuses me. This would be outright craziness, for there is not even the pretense of a legitimate financial transaction here. I'm no financial wiz, but who would buy a matured bond?
every time people talk about banking and then use the terms like bonds, securities, mature, etc.. I get so f*@king confused and get no idea what the f@#k they're talking about..
what do people f@*king mean by..
1.) BONDS
2.) GOVERNMNET BONDS
3.) GOVERNMENT SECURITIES
4.) and what the f@*k do people mean by MATURITY
GOD!! can people just make it simple
Roughly speaking, a bond is an IOU.
Say, for example, you have $1,000 burning a hole in your pocket.
Say, I need, but do not have, $1,000 to buy a computer for my business.
I might come to you and ask for $1,000 and write out a promise (i.e., an IOU) to pay it back in one month.
You, of course, would scoff at my proposal. Why? Well, which would you prefer
1. having your $1,000 for the entire month of November; or
2. not having your $1,000 for the entire month of November, but returned on the last day?
Since you, and every other rational person on the planet, prefers $1,000 now to $1,000 later, you would rightfully ask me to pay extra for the privilege of using your cash for the month.
So, if you give me $1,000 dollars, in exchange for an IOU upon which I promise to pay you back $1,000 plus 10% interest on November 30th, 2008; then November 30th, 2008 is the date the IOU "matures."
Since the Central Bank is printing money to buy bonds below what the market would price them, it is forgiving a part of the interest that the government would have to pay. And since printing money inflates the money supply, it devalues the existing bond supply and forgives a part of that cost to government as well.
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Peter Griffin: every time people talk about banking and then use the terms like bonds, securities, mature, etc.. I get so f*@king confused and get no idea what the f@#k they're talking about.. [...] GOD!! can people just make it simple
[...]
Sure, telling people stories is nice, but do you really think you can grasp economics (or anything else, for that matter) without going in-depth?
For example, I could "explain" quantum physics in simple words to you. But then you'd have to take my word on everything I say. You couldn't even decide if I was lying or not.
The point is one can't argue something in simple words. One can tell stories, set up a big picture, but he can't reduce thousands of pages of knowledge to a few words. Making things simpler is a goal, but it has its limitations. Why don't you look up those words on Wikipedia or something?
Okay, earlier, Jonathan wrote this:
"When the bond matures is when the banks cash it in from the Fed for the money they are owed."
I should get straight on this before figuring out the rest.
Is the creation of money this overt? To buy a matured bond is to buy nothing at all. How does their credibility remain intact with such practices?
Perhaps there is some Austrian reading material on this, that goes a little beyond "the Fed buys an asset with a check."
Wow, you are like Peter Griffin. But yeah, I agree. Not having done any finance courses yet and only economics courses, the terminology throws me off. So much gobbledygook.
-Jon
To darkness I condemn you...
The Investopedia.com dictionary is a superior resource in this regard.
Does the Fed buy matured debt?
No debt is forgiven. About 55% of US debth is financed by the FED. This is the Fed main source of income, which we pay in income taxes. In theory is debt the US goverment ows to itself but WE end up paying for it.
I am starting to think my question is too simplistic, but I will try one more time:
Taking the example of a $1,000 T-bill, what are the precise steps taken, in sequence, starting with the treasury and ending with the commercial banker, to create new money?
This question, if it isn't too simplistic, should be handled easily, Austrian-style.
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