Uncle Sam’s New Credit Card

The National Review reports:

Uncle Sam has a new credit card. It’s flashy and different. It’s also potentially destabilizing — but like many people who get a new credit card, he’s thrilled to have it and is having a hard time seeing any downside to its use. This enthusiasm could prove to be shortsighted for the long-run health of U.S. finances.

For most of his life, Uncle Sam has relied on an older, less flashy credit card. It is accepted everywhere and by everyone and comes with an incredibly low interest rate. It’s served him well and has allowed him, at times, to run up large balances without becoming viewed as a credit risk. This older credit card is better known as the U.S. Treasury, and its “balances,” now near $15.5 trillion, are the U.S. public debt.

The new credit card is not accepted everywhere. In fact, very few places take it, and typically it charges a higher interest rate than the older card. It is, in other words, inferior, but Uncle Sam seems happy to have it at his disposal. After several years of trying it out, he officially became a permanent card holder this year. The new credit card is the Federal Reserve, and its “balances,” now near $1.5 trillion, are excess bank reserves.

The new card arrived in January, when the Federal Reserve announced it was going to indefinitely stick with its post-financial crisis “floor” operating system. This system allows the size of our central bank’s balance sheet to be independent from its stance on monetary policy.

What does this mean? Well, for example, the Fed can now expand its balance sheet by creating money to purchase new assets without causing its target interest rate to change. The Fed, in other words, can now make new money without adding stimulus to the economy. This money, however, can only be used by banks and is why Uncle Sam cannot use this new credit card everywhere.

An article , well worth your time.