The things we know that aren’t true

October 18, 2016 § 49 Comments

Most not-financially-literate people think that sound financial management is about cash flow. This is wrong, even badly so, but it is at least somewhat workable for a household to a first approximation: as long as you keep bringing in more cash than you spend, the wheels stay on.

Institutions are nothing like that. (Even households aren’t really like that, but it kinda sorta works to a first approximation). What is more, what looks like cash flow for an institution like the United States Government, isn’t. So everything you think you know about USG finance is wrong: an illusion created by a superficial, outright false analogy.

In layman’s terms, a balance sheet is an inventory of all of the property that an institution controls and all of the various financial claims against that property. It is impossible to know the financial health of an institution, including whether things are getting better or worse financially, without understanding (under whatever labels) the institution’s balance sheet and the trajectory of its balance sheet; that is, the changes happening to its balance sheet.

In traditional accounting these are reported as balance sheet (at a point in time), profit and loss (over some interval), and cash flow (over the same interval). The first is a fundamental snapshot of the financial state of the institution; the latter two tell us specifically how the institution is changing financially.

Balance sheet is fundamental.  It provides the current financial state of the institution at a particular point in time.  The other two reports tell us what financial changes happened to the institution over the reporting period.

Profit and loss measures (roughly speaking) the gain or loss in ‘equity’, that is, it answers the question (in great detail) “what has happened to the value of all of the property on the balance sheet, minus the satisfaction of all of the remaining financial obligations against that property?”

Cash flow measures the flow of liquid property (“cash and equivalents”): property which can be easily and quickly traded for something else. Cash flow is of secondary importance: you have to keep an eye on it to make sure you keep enough liquid property on hand to pay your bills on time, but in general liquid property is not as productive as other capital so it is best to keep it to a manageable minimum.

People think that USG revenues, expenditures, and deficit  numbers give meaningful insight into cash flow. And many believe that the ‘national debt’ provides meaningful insight into the health of the (nonexistent) USG balance sheet.

They don’t. Intake and outflow of fiat dollars does not constitute cash flow or an approximation of it, and the balance sheet and P&L are a complete black hole.

The reason fiat dollar flow doesn’t constitute a USG equivalent for cash flow — as I have explained many times now — is that we can’t measure the change in balance sheet liquidity of an institution using securities issued by that very institution as a metric. Measuring Google ‘stock flow’ is not meaningful information, in itself, about changes in the health of Google’s balance sheet. And in the case of USG we don’t even know what kinds of things we ought to be using to measure, or what specifically we ought to measure, etc.

That is, we cannot answer the question “what is happening to the liquidity of USG’s balance sheet?” — BECAUSE WE DON’T HAVE A BALANCE SHEET.

We also cannot answer the question ‘what is happening to retained earnings’, or a thousand other pertinent questions.

What we actually have in terms of real information is no balance sheet, no P&L, no cash flow, and some back-and-forth in the institution’s own securities which create the illusion of something kinda sorta similar looking to cash flow as long as you don’t pay attention.

And the biggest danger here is not the things we don’t know. As some wag said, the biggest danger here is the things we know that aren’t true.

§ 49 Responses to The things we know that aren’t true

  • Tom says:

    The analogy that made at least part of this clear to me is a company that keeps buying things with stock it keeps issuing. Say its shares are worth $10, it issues a share, which dilutes the company a tiny bit, and trades the share for a $10 item. Now each share should still be worth $10, as the company is slightly bigger. And it keeps issuing shares, and keeps buying, until it owns everything. The value of everything didn’t go down so the company is still not diluted.

    It’s not the act of issuing shares that dilutes the value of the company, it’s the act of trading those shares for something that’s not worth as much as it appears. (I.e., $2 billion company + $2 billion company should = $4 billion company but often one of the $2 billion companies was actually only worth $1 billion.)

    This is why companies are measured in something else – dollars – not shares of their own stock.

  • notruecatholic says:

    I tried to do a balance sheet of the government using your concept to see if I could find something. After finishing the balance sheet and trying to calculate how the government did “oh, we can not use dollar, I forgot”.

    I tried to think of a far right utopia with everything contracted to third party and only with what are the taxes, taking them, and printing of dollar to be decided to can pay the contractor. And same thing, yeah, it is really a hard problem.

    That was few weeks ago. What are the ressources of the government? Well, as you said taxes represent a claim of ownership to part of the wealth made in the country. I tried to think about that deeper.

    The blog “defence and Freedom” is one blog I find interesting despite its liberalism (the freedom part, and even the defence part, I’d prefer a blog “just war theory and faith”). I like his line of argument “defence could be done with only 1% of GDP and we could use that to help the economy instead and be even richer which would make it even easier to finance our army to be safe”.

    It is no general soverign balance sheet with unit of calculation. But I like the idea being the argument. If the US economy is richer, the x% of the economy owned via tax is bigger too. It is tricky to measure wealth (GDP in nominal dollar, in constant dollar, in big mac index?). So it is more of a “non totally irrational way to guess it”.

    I am pretty sure I am being the totally financially ignorant person that I am in my theory of how to walk in the dark and that you will destroy my hope of “guide for beginner sovereign : how to talk in total accounting darkness”. But being corrected in my mistakes is what I seek.

  • A Portuguese man says:

    So, I’m not sure whether I asked this already or not, but I’ve meant to for a while:

    Is there any known example of a balance sheet or – it’s equivalent – for any sovereign at any point in history?

    It’s not as if sovereigns, economies and markets are a modern creation. The Romans, at least, had a pretty sophisticated economy it would seem. And if their is perhaps too sophisticated (thus suffering from the same problem as ours), then any Christian state afterwards.

    Do we know what a sovereign balance sheet looked like in medieval times?
    If we do, why can’t we start there, at least?

  • Zippy says:

    A Portuguese man:

    I am not aware of any historical sovereign who made transparency of his own finances into a high priority and developed a conceptual framework, etc which accurately treats sovereign currency as a tax voucher security, etc. I’d be happy for someone to point out an historical candidate.

    But as far as I know a metaphysically realist account of sovereign finance concrete enough to be a basis for developing an actual sovereign balance sheet for an entity like USG does not exist and has never existed. The ‘pastoral’ capitulation on usury made the development of such a thing unlikely in the late medieval and modern eras.

  • PB says:

    Zippy: Are taxing and spending redistributive in a sort of round about way? Money taken from x is not literally given to y, but by taking money from x inflation that would be caused by giving money to y is prevented. In this way are discussions about how redistribution of wealth at least somewhat coherent?

  • Zippy says:

    “Redistribution of wealth” seems to beg the question of moral entitlement, and at present I am just discussing the state of accurate financial description (that is, the fact that we don’t have one even conceptually). But clearly the sovereign moves his wealth (the wealth he controls) around, yes.

  • Zippy says:


    Yes, it is a hard problem. People who think they understand it just reveal their own intellectual limitations (absent a concrete proposal of a workable sovereign accounting system).

    Back when I used to think of sovereign finance as just a ‘bigger version’ of private finance (I figured we just didn’t bother to do the necessary accounting for USG, but that it would be possible to start doing so in principle) I often wondered why a mature sovereign needs to levy taxes at all. A sufficiently large capital endowment ought to be able to finance national defense and the like in perpetuity, without levying any taxes. And surely USG owns a large enough capital base to do that already, no? If not then we ought to be able to at least set a target date for the cessation of all taxation, no?

    But that was just a beginning in terms of thinking about the problem (with my finance hat on). The more I’ve thought about the problem, the more convincing the case that it is just one of those things that nobody really understands, but about which everyone has useless and dangerous opinions.

  • […] confident statements about the financial state of USG are expressions of the speaker’s feelings, not statements of known or even knowable […]

  • A sovereign qua sovereign doesn’t need to balance a budget, as it’s impossible for him to go bankrupt.

    However, the stability of the market (one where people are allowed to set prices however they like) does require that a sovereign issue the same amount of money roughly, as he takes in. A simple version sure, but a basis for a conceptual framework.

    Regarding bonds, it seems to me that they’re basically illiquid money. Issuing them is a way of exchanging present inflation (by converting highly liquid cash into less liquid bonds) for even more aggravated future inflation. Their issuance is thus imprudent.

  • Zippy says:


    the stability of the market (one where people are allowed to set prices however they like) does require

    Cool story.

  • PB says:

    Zippy: Thanks. I didn’t really mean to get into any moral questions there.

    I find your economic realism approach very compelling but it isn’t my field. Beyond some basic macro knowledge and a few details here and there I don’t know a whole lot about economics and finance. I would be interested to see an economist engage with you on these matters.

  • Zippy says:


    Just keep in mind that if finance is the science of “farming” property, economics is the weather forecasting of property.

    I expect laymen don’t much distinguish between the two, but finance – when it comes to private institutions – is much more of a ‘hard science’, down in the nuts and bolts of property, contracts, securities, etc.

    Economics, especially the macroeconomics that folks are usually referring to in these sorts of discussions, is (sorry if this offends anyone) basically like weather forecasting. It isn’t that there is nothing to it, but even if you go in with low expectations you still might be disappointed.

  • […] ‘gold standard’ dollar is the same kind of thing.  It is a financial claim against the balance sheet of the sovereign; the financial rights conferred are the satisfaction of debts owed to the sovereign, in particular […]

  • […] transparent and honest than gold standard currency any number of times. But of course many folks know all sorts of things that aren’t true about sovereign finance, and can’t tell the difference between a financial security and the […]

  • MMPeregrine says:

    Zippy, do you know of any books on the history of accounting? I haven’t heard of any good ones but browsed a short while on amazon and found this one –

    It seems worth checking out of the library if they carry it.

    I’m also wondering if you’ve published a reading list anywhere?

  • MMPeregrine says:

    Also, do you know of any books written from a Thomistic (metaphysical realist) framework that critiques TVM and other modern theories in finance that you’re critical of?
    I’d like to learn more about these topics from a realist perspective since I’ve been pretty heavily indoctrinated in the prevailing economic liberalism of the day.
    It seems Aquinas addressed these issues fundamentally but it would be helpful if you can point to a current or recent Thomist who addresses the specific issues we face today. I enjoy your blog but I prefer reading books. Thanks.

  • MMPeregrine says:

    Zippy, I’m wondering if you’ve read this book –

    I was steeped in Mises institute nonsense for quite a while before I woke up and realized the interdependence of their economic liberalism with social libertinism. I’m hoping to read a good thrashing of Austrian economics and I’m thinking the above linked book might be the one.

  • Zippy says:


    Keep in mind that I am an entrepreneur, investor, and finance pro. I am not a Thomist, in the sense of having formal training in Thomism. I came to my understanding of usury by reading primary sources – St. Thomas and the Magisterium – as a finance guy, under the assumption that they were not morons.

    I don’t agree with everything I’ve read in any recent usury book, and as far as I know a metaphysically realist school of economics and finance doesn’t even exist. A young and ambitious person could make a name for himself that way.

    One good recent book is The Church and the Usurers by Brian McCall. Full disclosure though he complimented me on my Usury FAQ over email some while back. I’ve been meaning to do a ‘deep read’ of his book precisely so I can recommend it when I get inquiries like yours; it is likely worthy of that recommendation but my own laziness has prevented me from doing the due diligence to give an in depth review with my own take on various matters.

  • TomD says:

    I believe Zippy has mentioned that every modern economic system is infused with anti-realism; careful study and consideration has to be done to even hope to find the tiny aspects of reality in a given system; for example, currency being related to the taxing power comes from MMT, but MMT is anti-realism garbage.

    For a realism-based financial study, I would start with a careful and full study of Thomas Aquinas; the Usury FAQ is a good beginning, keep reading and re-reading it until you have the basic arguments down; read all linked items, and perhaps even read something like Ed Feser’s books on Aquinas.

  • Zippy says:

    Also, as a quibble, I am not critical of the time value of money as a parameter in economic theory.

    I am critical of TVM as a putative moral justification for charging interest on a mutuum loan (any loan secured by personal guarantees).

  • MMPeregrine says:

    Zippy – thanks, I have read Brian McCall’s book on Usury and learned a lot from it. It would be excellent if you could review it on here. I think your readers, including me, would benefit from that. Have you heard of the gentleman who wrote the forward – Anthony Santelli? He has a post here that I’d be interested to here your thoughts on – To sum it up, I wish McCall found someone else to write his foreward.
    Brian McCall also has a more recent book that I was led to because I enjoyed his book on usury – Well worth reading. I do think he’s SSPX though which gives me some general reservations reading his stuff. I understand them to be [probably simplistically] modern protestants.
    Understood on TVM, that helps clarify it for me.
    Thanks for reading and responding to all posts on here, including mine.

    TomD – thanks. I have begun reading Ed Feser’s books in the hopes that it will prepare me to dig in to Aquinas more profitably. Next up for me is Scholastic Metaphysics. He’s probably my favorite contemporary writer. I’ve tried to move away from internet reading with the exception of this blog and Ed Feser’s.

  • Zippy says:

    Yes, well, I like your summary of that blog post. I suppose as a story of one person’s meandering journey from one error to another, ending up nowhere in particular, it might be someone’s cup of tea as reading material, but, well, tl;dr.

    My approach was rather different. When I wanted to know what the Magisterium has actually taught about usury, I cracked open Denzinger. I tend to be a primary source guy whenever possible, because books written by scholars citing books written by other scholars turns into a game of telephone pretty bloody quickly. And my knowledge of finance is only partially academic. Getting an MBA introduced me to some basic concepts and jargon, but the majority of my knowledge comes from actually negotiating contract terms, structuring financing rounds, building capital structures, issuing and purchasing securities, etc.

  • PB says:

    MM Peregrine: The book looks interesting but some of the accusations Storck levels at his fellow Catholics in that review are gross calumnies.

  • TomD says:

    I wonder if part of the problem is that the modern science of economics (and perhaps politics) is the science of discovering the formal system that will prevent injustice – which is an impossible task.

    Understanding this is made more difficult by the fact that the Church rarely (if ever) positively proposes a system outside of its area of expertise, instead offers criticisms and locations where other proposed systems enter into error.

    I do think one of the biggest things is for Catholics to realise exactly what things like modernism, nominalism, and especially consequentialism are, and how to recognize them when you encounter them.

  • TomD says:

    Everyone who is anyone should own a copy of Denzinger, as it’s a great jumping off point for many things, including baptizm by beer.

    A completely random side note – Catholicism and Evolution: A History from Darwin to Pope Francis is similar to what Zippy has done for Usury but for Evolution, and may be of interest. I certainly enjoyed it.

  • itascriptaest says:


    What dido you find objectionable in Storck’s piece?

  • MMPeregrine says:

    TomD, thanks for the references. I’m trying to figure out what my 2017 reading/study plan will be, I may need to put Denzinger at the top of my to buy list.

    Chaberek’s book on evolution looks really good. It’s a topic of interest for me mainly because evolution seems to be a popular starting off point for all types of errors. I read Chesterton’s Everlasting Man almost 10 yrs ago and have been skeptical about evolution ever since but never really dug too deep on the issue. Another good book on the topic (though I’ve only browsed through it) is found here:
    One idea that really stuck out for me was near the end of Bonnette’s book he points out that Pope Pius IX declared the dogma of the Immaculate Conception in 1854, Our Lady of Lourdes appeared in 1858 to help confirm the dogma, and Darwin’s book was published in 1859. Essentially, what I derived from it was that the Blessed Virgin Mary appeared partly to confirm the truth of original sin which would very soon after be denied by evolutionists. The ongoing miracles at Lourdes help reaffirm the truth for us. — He makes a better argument for this and I don’t have the book handy right now.

  • MMPeregrine says:

    PB – I second itascriptaest. I couldn’t see the calumny. What are you referring to?

  • donnie says:

    Keep in mind that I am an entrepreneur, investor, and finance pro.

    Zippy, forgive me if this is far too off-topic, but I always wanted to ask you, given your personal background, what you thought of Opus Dei?

  • PB says:

    Sorry for the late reply. I refer to the treatment of Austrian Catholics like Tom Woods. Woods, like some Austrian friends of mine, does not at all think that abortion should be legal. Tucker, though goofy, does not support the legalization of gay marriage. (He wants marriage to be privatized, and this may be a bad idea but it isn’t the same as supporting gay marriage).

    Austrian economics is strongly linked to liberalism but believing in say, the Austrian theory of the business cycle does not make one a liberal and it certainly does not make one a heritic.

    I’m not an Austrian but I don’t like seeing people condemned as heretics without good cause. That isn’t to say that Woods et. al. aren’t wrong about various things but wishing that they were cast them out of the Church seems perverse.

  • PB says:

    To clarify further I do not mean to say that the libertarian ethos is compatible with Catholic teaching or right reason. But one need not make false accusations about particular libertarians to argue against libertarianism.

  • MMPeregrine says:

    PB, Storck was mainly referring to the articles written at Mises institute website, not necessarily those written by Woods. I read probably more than 1000 articles at that website over the course of a couple years and I can attest to what he said although he may have been painting with a broad brush. But I also think Tom Woods has written some good stuff. I’ll take your word for it on Jeffrey Tucker’s position.
    However, one of Storck’s points in the book review is that guys like Woods and Tucker who refer to themselves as Catholic should do more to distance themselves from the writings of Murray Rothbard. That point really resonates with me because it was some of Rothbard’s positions (ie on abortion and infanticide) which completely turned me off Austrian economics a few years ago. I now believe that Rothbard’s positions are the logical conclusion of libertarianism and also Austrian economics. I can only thank God that I was disgusted enough by his views that I didn’t go any deeper into their ideology.
    In summary, I don’t think Storck’s piece included any calumny but he could’ve presented his position more precisely which is important when criticizing someone else.

    Here’s a couple links to Edward Feser’s history with libertarianism and one on his critique of Rothbard in particular (they’re pretty long and I haven’t read them all the way through yet)

    Zippy, I do wonder if you’ve taken up a position on Austrian business cycle theory? Or if you’ve written anything about it.

  • MMPeregrine says:

    PB, I wrote a longer comment but maybe it went to the spam filter (I had a few links in one post). I’d say that in general you’re right – we should be careful when calling someone a heretic. It would be better to point out what someone said and say, “that’s heresy” to give the person a chance to distance themselves from the heresy (hate the sin, love the sinner). But I agree with Storck’s point that Woods, Tucker and others who present themselves as Catholic should be more careful to distance themselves from certain positions taken by most libertarians and Austrian economists, including the prominent ones like Rothbard. It was Woods and Tucker being outspokenly Catholic that initially sparked my interest in libertarianism and Austrian economics. I’ll just say that I’m glad I don’t spend any time taking in that ideology anymore. But I’m still trying to root it out of myself.

  • Zippy says:


    The Austrian conception of economic value as strictly subjective invalidates everything they say from the ground up. Their business cycle theory rests on a conception of fractional reserve lending which is completely false (it seems plausible at all only because of the presumption of usury and failure to distinguish between usurious and non-usurious credit), and which misapprehends what ‘money’ is and is not. Among other things. Doing an inventory of all the things they get wrong doesn’t sound like a fun project to me; but suffice to say that any correspondence between their theories and reality is akin to correspondence between palm reading or astrology and reality.

  • Zippy says:

    More than two links will trigger moderation, but I approved the comment once I saw it.

  • PB says:

    MM Peregrine: Fair enough. I think Storck should have been more precise, and perhaps I overreacted a bit.

  • MMPeregrine says:

    Zippy, thanks for the reply. You wrote, “Doing an inventory of all the things they get wrong doesn’t sound like a fun project to me”
    I have some friends and others I know still drinking in from their fountains so it would likely be worthwhile for me to take on such a project.
    I will say that I am very grateful to have read some of Chesterton (Orthodoxy, What’s Wrong With the World…) and CS Lewis (Abolition of Man) prior to reading any Austrian economics. That helped guard me from some of their more blatant errors and I finally stopped reading them.

    In my own experience, I found that I had developed bad moral habits and that helped lead me into intellectual errors more so than the other way around. You seem to focus your blog mainly on intellectual errors, but I really appreciated your post about – the problem is you, and the solution is repentance. That is so true. There’s a good quote on this (I think Fulton Sheen’s, but paraphrased), “If you don’t live what you believe, then you end up believing what you live”. That was true for me and I don’t see how I could’ve been set straight without the Sacraments of the Catholic Church.

    Do you have any opinion on what usually comes first, corruption of intellect or corruption of will. Of course, that may be a false dilemma since they obviously offer mutual support to one another. But I think it’s a good question to consider.

  • Zippy says:

    I think corruption of will is mildly precedent to corruption of intellect: I desire, therefore I rationalize. The old internal debate goes like this:

    “I want to have sex with my girlfriend. The Catholic Church says I shouldn’t have sex with my girlfriend. Therefore there is no God.”

  • donnie says:

    “I want to have sex with my girlfriend. The Catholic Church says I shouldn’t have sex with my girlfriend. Therefore there is no God.”

    Someone once told me this story of a Protestant minister who would stay in touch with the young adults in his church and get coffee with them when they returned home from Christmas break. Oftentimes the young adults would confess to him during these coffee sessions that they were having doubts about their faith, and I’m told that the minister would always respond to them with the same direct question: “So who are you sleeping with?”

    I often wonder how many of the agnostics and atheists I know would still be believers if only Christ had given us the go-ahead to have premarital sex.

  • Zippy says:


    … given your personal background, what you thought of Opus Dei?

    I’m too ignorant to propose a worthwhile opinion. I like the idea of it, I suppose, but rendering anything resembling an opinion of the actual thing is beyond my competence.

  • […] is careless by the government, then you haven’t grasped even half of their negligence. Read Zippy for a better […]

  • I was thinking about this today and was wondering: does it even make sense for the government to create a “budget” in dollars? It seems that since dollars spent is not an approximation of cash flow that this practice also doesn’t make any sense, but I wanted to know what you thought.

    Also, is there a simple way to explain this to those who aren’t very financially literate?

  • MT says:

    The basic principles are easy. Since the US government issues a currency, it literally issues money when it wants something done. Being the issuer of money means that the game fundamentally different, because the issuer never needs to gain money to use it, like everyone else has to.

  • Zippy says:

    An analogy I have used before is Google stock. If Google prepared its budget and financial statements in units of Google stock it would make no sense.

    Google could issue and retire the same number of shares in a given year – have a ‘balanced budget’ – or even run a ‘surplus’, that is, retire more shares than it issues in a given year. But this would tell us next to nothing[1] about Google’s financial condition.

    This is just an analogy because the sovereign is different in kind from a private company operating within the sovereign’s marketplace. So accounting for sovereign finances in units of his own securities as if that made any sense is even worse than trying to state Google’s financial condition in terms of Google stock.

    [1] It wouldn’t tell us literally nothing at all, but if we were under the impression that this was a sensible way to do budgeting it would give us a radically false and distorted picture of reality.

  • donnie says:

    Been meaning to ask this for some time, but could you help me understand how the Federal Reserve System fits into all this? I vaguely remember learning at some point that the Federal Reserve System earns a “profit” that gets transferred to the US Treasury at the end of the year.

  • Mike T says:

    So accounting for sovereign finances in units of his own securities as if that made any sense is even worse than trying to state Google’s financial condition in terms of Google stock.

    Sovereigns frequently have to borrow private money in order to pay for public expenses, so they do have to keep an accounting of that debt in their own securities because it’d be nonsensical to do anything else. I am aware that that is not the whole picture of sovereign finance, but many sovereigns have found that after having to use the private sector to finance public expenditures and being unable to debase the currency, their financial situation is awfully similar to a corporation’s.

    Except hopefully they have an army loyal to them who can help them fight their way out of bankruptcy somehow.

  • Zippy says:

    Mike T:

    Sovereigns frequently have to borrow private money in order to pay for public expenses, so they do have to keep an accounting of that debt in their own securities because it’d be nonsensical to do anything else.

    You are still trapped in the bluest of blue pill perspectives on this subject, to use the popular metaphor.

    I am aware that that is not the whole picture of sovereign finance …

    It isn’t “not the whole picture”: it is a completely false and misleading picture. It is like saying “I understand that the green cheese theory of lunar composition is not the whole picture, but …”

  • Zippy says:


    I’m no expert on the details of how it works, but my understanding is that the Federal Reserve serves the purpose of being the (sovereign) bank enabling (private) banks to do business with each other. Private banks need an efficient way to settle accounts with each other, and the Federal Reserve banks provide that facility.

    Private commercial banks are required to keep some amount of capital “deposited” (invested in) the regional Federal Reserve bank, roughly speaking.

    You pay Walmart by using your bank card to transfer title to some of your deposits, at YourBank, to Walmart.

    Lets say that Walmart does business with WBank, not YourBank. Meanwhile zillions of other WBank and YourBank depositors do zillions of additional transactions throughout the day.

    At the end of the business day there is some net settlement required: maybe more has been transferred from YourBank depositors to WBank depositors, or maybe vice versa. If they were the only two commercial banks then the net would be transferred from the one bank’s deposit account at the Federal Reserve to the other’s.

    There are more than two commercial banks of course, so settlement is actually much more complex.

    Now because the regional Federal Reserve banks are banks — the private commercial banks are their “depositors” — they produce a profit (roughly $100 billion a year at present), which nets to the US Treasury.

    This “profit” isn’t really a profit in the usual sense though: it represents the retirement of sovereign-issued securities, much as tax receipts are not really “revenues” but are the retirement of sovereign-issued securities.

    That could be wrong but it is my own understanding of the basic picture.

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