Reply #22: Banks lend first, then seek reserves later..

[girl gone mad]

you've got your cause and effect reversed.

As the brilliant Edward Harrison http://www.creditwritedowns.com/2011/05/banks-are-never-reserve-constrained.html">writes:

"Some people still believe in the money multiplier taught in old economic textbooks that fractional reserve banking has banks taking deposits, multiplying them as much as possible, subject to the reserve ratio, and making a much larger amount loans. That is not how it works. In practice, banks don’t wait for the reserves to be available to issue loans. They make loans first and then borrow the reserves in the interbank market. The loans come first, not the reserves.

Banks are never constrained by reserves or reserve ratios. Banks are capital constrained. In our fiat money system, the central bank uses reserves in the system to help the it hit a target interest rate. So, the central bank provides the system with enough reserves to meet any reserve ratio at its target rate. The reserves are about helping set interest rates, not about pyramiding money on a reserve base."

If you understand that government "printing" doesn't lead directly to inflation, why do you insist on bringing up inflation every time you weigh in on the topic of the government paying back its Social Security obligations? Another misstatement you've made is that SS debt is issued when the bond is redeemed. Actually, at the point of redemption there is a transfer of funds in exchange for rescinding the bond, the debt is canceled by the face amount while bank reserves are increased by the same amount.

The bonds held in the Trust Fund represent the savings of the American workers who have paid into the system throughout their working lives. These funds are already accounted for on the national balance sheet as a private sector surplus. Paying out this obligation does not represent new money creation, nor would it generate inflationary pressure.