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Money Creation (Fractional Reserve System) and the US Debt

edited May 22 in Other Investing
I am starting this thread because I have more questions than answer when it comes to money creation. Econ 101 explains that "money creation" is what banks do with excess reserves and how banks can create $9 of debt (loaned money...known as a liability) from a single $1 of revenue (known as an asset or as a bank deposit).

From Econ 101:

The Banking System and Money Creation

From this reading, I then found data on US income tax payments (deposits (taxes) made to the IRS).


Let's consider the Federal Reserve and the IRS as one big bank. In 2019, the IRS collected $3.56 Trillion dollars in tax revenue. This was collected from earned and unearned income (taxes owed by US citizens). On the liability side of this bank, US citizens are running a debt (issued by the US government) of 31.8 Trillion dollars.

In the banking world (fraction reserve system),

Assets + Liabilities = Total Deposits


US Tax revenue ($3.56T) + US Debt ($31.8T) = $35.36T

Using the same numbers we can determine that 10% reserves equals $3.536T which is slightly less than the $3.56T collected in tax revenue (IRS assets). This would make a bank's accountant department happy.;)

If this Fractional Reserve system is how banks operate (10% bank deposits & 90% bank loans), it appears the US government (Bank of USA) operates in a similar manner, collecting about 10% in revenues (taxes) and loaning out 90% in debt (liabilities).

Now, if we all can agree that the US national debt is "loaned out" and that it will create new tax revenues for years to come and so long as we are collecting at least 10% of "total deposits" in tax revenue each year we should be as solvent as the banking system...

O.K., now I see the problem!:(


  • beebee
    edited May 22
    Other questions and ponderings I have:

    How much of the US debt is a loan that has to be paid back (think of the Student Loan program)? In theory, this should be a good thing.

    How much of the US debt become taxable to the recipient? If US debt pays for products and wages... they are both taxed which becomes an asset (to the IRS).

    How much of the US debt (liability) become another bank's asset? If US debt pays for someones income and they then save a portion of that income, then doesn't a portion of US debt become another bank's asset?

    US debt pays for Military spending:
    This debt becomes personal income to soldiers and corporate income to suppliers. They both spend that income into the economy (creating other people's incomes...who spend, pay taxes and save). Rinse and repeat.
  • OK, Pandora. This thread should be interesting.:)
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