> because the Treasury needs banks to purchase government bonds

Does it? Or is this just how the system is currently designed?

50 years ago we might have asked who will provide the Fed with the gold it needs to issue enough currency to avoid deflation as the population grows exponentially.

>Does it? Or is this just how the system is currently designed?

Yes, to both questions. The US Debt is at $31 trillion, it only works as long as the system keeps feeding money into government bonds.

The entire global financial system (not just the USA; the rest of the world is dependent on the USD and US banks) is reliant on this cycle of money.

>50 years ago we might have asked who will provide the Fed with the gold it needs to issue enough currency to avoid deflation as the population grows exponentially.

It was realized the gold standard stifled growth too much, and was abandoned just about 50 years ago as well.

You can have a safe system without growth (everything Tech was built off credit/debt and castles in the sky until decades after the companies were founded) or you can have the tech industry with a debt-credit based system.

That does not address the second question at all? The bonds need to be bought by someone, but you gave no argument why this someone has to be banks and why banks need tax money for bailouts on top of that.

The banks need to buy treasuries, because they treat bonds as a risk free financial instrument. Everyone else would have to recognize the risks inherent in those bonds and thus demand higher interest. The federal government can't afford that.

The reason why banks need to be bailed out, is because they treat treasuries as risk-free financial instruments. If they didn't get bailed out from time to time, they'd have to recognize the risk in buying treasuries.

So our banking system needs somewhere to park capital risk free, and it’s economically desirable that’s in a place that doesn’t create other distortions such as asset inflation or malinvestment. So we have treasuries as a tool for the financial system.

But there seems to be a premise in this thread that the US Gov needs (as in has no other possible choice, even via legislative change) to sell treasuries in order to fundraise.

I accept that’s sort of how the current system works in that effectively the US Gov creates capital/spend in the financial system via various programs and investments and attempts to offset inflationary effects / currency deflation effects by taxation and other revenue before finally encouraging other parties to allocate capital out of the system in the form of treasuries to make up the shortfall.

Effectively as I see it a treasury is then a promise not to spend capital for the term in exchange for the promise you’ll get the expected present value of that capital returned at the conclusion of that term (or in the case of TIPS/I-Bonds, the best approximation at the actual present value of that capital at that time).

Amongst other features, this neatly “allows” the US Gov to allocate an equivalent amount of capital to a purpose it considers appropriate while theoretically lessening impacts compared to simply spending that money without the offsetting treasuries.

But I’m not entirely sure there’s some sort of fundamental rule that the US Gov with the support of the Fed “needs” anyone to buy treasuries - together they could, as an example I’m not necessarily advocating, provide a safe haven facility for anyone who wanted it and continue to influence the monetary system and zero-risk rate of return (eg by the Fed paying interest on reserve accounts as they have since 2008) while otherwise having the Fed simply create the currency the government requires for deficit expenditure (eg by directly buying treasuries from the Gov if we perpetuate the illusion) and using other fiscal policy to control the inflationary/distortion effects of this spend.

That is, I’m not sure it’s the case that the US Gov exactly needs the banks to borrow treasuries because it could not afford them not to. Rather, the value of treasuries is as a measure to absorb excess liquidity, provide safe haven, and adjust risk behaviour in the financial system.

My open question is whether the current system is the only way, yet alone the best way, to practically achieve this. goal?

you think inflation is a problem now, wait until Congress has the literal power to order the Fed the print money which is effectively what you are proposing.

I do not trust the Fed, but I Sure as shit do not trust the US Congress.

The federal reserve does not print money, the Treasury does.

Supposedly the debt ceiling prevents runaway spending. That already doesn't work because money is loaned into existence in ever-increasing amounts.

Of course it is the fed who prints the money in the US and has dual inflation/unemployment targeting mandate. In other countries this role is typically performed by the central bank.

https://www.federalreserve.gov/aboutthefed.htm

Wrong..

The Treasury makes coins.

Paper money is a "Federal Reserve Note". It comes from the federal reserve not the Treasury

The Treasury creates coins or bonds. This is one of the reasons congress has floated the idea of the 10 trillion dollar coin. As it is within their power to order the Treasury to mont that. They can not order the federal reserve to make a 10 trillion dollar bill

The debt ceiling doesn’t control spending because it is a misnomer. The money has already been spent. The debt ceiling controls whether the government will honor the obligations it has already made.

And that is cheaper? How much more expensive would a "correct" interest rate be compared to bailouts+economic fallout+loss of public trust you get from the current "risk-free" fantasy?

It was explained, maybe you didn't connect the reasoning.

First, there are no entities that have the amount of capital needed to keep the bond market moving besides banks. This is a $50 trillion market that makes the stock market look like a lemonade stand. I would suggest you do some research on the bond markets, it will become immediately apparent why only central and private banks have the capital necessary to drive it.

It's the nature of a credit/debt based system, which is currently in a booming credit cycle (although perhaps the end of the cycle)

As to why do banks need tax money for bailouts?

The banks don't need tax money, if you're willing to let banks fail - which would likely be healthy in the long run.

But in the short term, Joe Middle Class can't get a car loan to get a car, Wealthy Sally can't get a business loan to start a company and employ 50 people, Minimum Wage Mike can't get a home loan after saving up money for 25 years.

It's certainly a shame that banks basically face no consequences and the taxpayer has to pay for it. But people's perspective on bank bailouts changes quickly when they realize the "side effects" are their credit cards no longer exist and their loan rates tripled.

Trying to keep up the growth half a century ago was the last thing that (at least the West) needed to do - and it was already aware of that at that point.

> Does it? Or is this just how the system is currently designed?

It does in the sense that the US Government will default on its financial obligations if banks don’t use deposits to buy government bonds.

I'm very much not saying that the outcome wouldn't be disastrous, but IME default is clearly unconstitutional, and so if statute and circumstance conspire to make default the only option then violating some statute to prevent default is appropriate, potentially to the point of just printing what we need to meet our obligations.

People can learn how to use Treasurydirect.gov instead of using their bank as a lousy bond broker. Inflation protected bonds, that you can buy only $10k a year of are some of the highest yielding risk free investments that exist. Banks should just make money off fees and hold short duration Treasury bills only.

Other institutions that have LPs should lend to businesses, students and home owners.

But then you don't have the convenience and liquidity of a bank account. The system works because the bank can invest the aggregate deposits of all depositors and still be ready to cash people out as needed (of course, barring a situation like this one, which is what the deposit insurance is for).

The majority of people don't need daily bank accounts. The only reason why we are using them is because to dollar notes have not kept up with inflation. A $500 bill from 1900 would be a $17,500 note today. Two of those notes provide more liquidity than the majority of bank accounts in the US.

Don't underestimate the risk of getting robbed of your savings.

My house has been broken into fewer times than the number of bankruns in the last week.

Perhaps in part owing to the fact that people don’t generally keep hefty sums of cash in hand?

Anyway, how are you expecting to transact digitally with your paper notes?

>Who will loan the government tens or hundreds of billions of dollars besides the banks? The [Fed/Treasury/FDIC] has no incentive to prevent banks from loaning customer deposits, because the Treasury needs banks to purchase government bonds

War bonds were bought by people directly. I see no reason why we can't have the same today. God knows the US needs a WWII sized investment in repairing infrastructure.

Can you think of any differences in the economy of the 1930s and 40s versus today?

Who is going to buy them? Most US citizens have less than a month's worth of income in their savings account. I'd be surprised if they enough confidence in their own income to tie even half of that up in war bonds.

Perhaps we'll be forced to accept that we cannot continue to have "endless growth" with a declining workforce. The cost of Labor is going to go up at all levels, and that will mean smaller profits and more inflation until things stabilize and enough of us are incentivized to do productive work.

Many (most?) Americans have no savings account. Not because they are poor but because a savings account is largely an obsolete anachronism. The common tactic of conflating "savings" with "having a savings account" is intentionally misleading.

Per the US government, the median US household has $1000/month they could invest after all ordinary expenses.

What?? This does not seem to match what I’ve heard from the government before.

What do they claim the median household income at?

Individuals purchasing war bonds helped, but didn't pay for WWII.

The war cost a little over $300 billion. $50 billion of that was through individual purchases of War Bonds, the rest came from banks and taxes.

Bankers and merchants have always funded the United States. A representation of Robert Morris, the "financier of the American Revolution" is painted in The Apotheosis of Washington, the fresco decorating the ceiling of the rotunda in the Capitol building where he is shown receiving a bag of gold from the god Mercury. Soldiers and supplies were paid for with "morris notes" which was a proto-currency of the US that was backed by Morris' personal fortune.

https://allthingsliberty.com/2019/03/how-robert-morriss-magi...

Just about 30 years later, banker Stephen Girard almost single-handedly funded the War of 1812.

This was a fascinating read. I was unaware of both Robert Morris and Franklin’s anecdote concerning IOUs. Thank you for sharing it.

So people rather than banks would now be sitting on hundereds of billions of losses. Instead of depressing bank profits those losses would be depressing consumption or home purchases.

Depressing home purchases might well be a good idea. Right now people treat them as investments rather than mere housing, and as a result that market is thrown entirely out of whack.

Indeed, home prices increasing at more than a modest rate is a bad thing for everyone in the long term.

Homes should be investments in the same way that a factory or warehouse is an investment. You buy instead of renting in order to fix the cost of doing business over time, not to speculate on potential future values.

You think it’s only people that buy homes? Laughing in Blackrock.

Yes, with "Land Bank" being a big thing now, with people just buying up land and holding it to simply fight inflation, things are just going to spiral out of control one way or another.

The US government already sells billions of dollars worth of various types of bonds to consumers every year. How is what you're proposing any different, and how would you entice more people to buy them than are currently buying T-bills, T-bonds, I-bonds, etc.?

Yup. The reasonable UX here is that you as a retail customer get to pick what assets your deposits should go into, and you take the risk. Bank just gets a minor cut for doing the admin work.

And yes, that means if you picked “10y treasuries at 1.56% interest rate” back in 2021, then 80% of your deposit would now be gone. You should have picked “3m treasuries at 0.1% interest rate”.

This whole idea that a bank deposit is some magical asset that you can never lose anything on (other than through inflation) is a leaky abstraction. Like with all leaky abstractions the happy path is great, but when it starts leaking it can get real bad.

I feel like treasury bonds (of your own government) have different risk profiles than most other investments.

They still have duration risk.

At the time of writing this comment I did not know that having funds stuck in long term bonds was a major factor in the collapse.

I was biased to assume insolvency rather than illiquidity.

>>Who will loan the government tens or hundreds of billions of dollars besides the banks?

Wait, I have a novel idea...

HOW ABOUT THE FEDERAL GOVERNMENT STOPS BORROWING (and spending) SO MUCH DAMN MONEY!!!!

I know, crazy idea that the government should (outside extreme conditions) have a balanced budget and not run deficits in perpetuity