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This chart at the St. Louis Fed has a lot of people worried about future inflation, because it represents idle money that, when lent out, could eventually flood the world with 10 - 12 trillion new dollars. But my father says that it has already been lent out in the form of short-term US Treasury notes.

So if it is cash that has not entered the monetary system, we could see some massive inflation when it is allowed to be lent out in our 10% fractional reserve system.

If it is in treasuries, then it's already out, and the chart doesn't pose such a threat.

Does anyone know if excess reserves are or can be held in US Treasuries?

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Two kinds of lending going on.

The first occurs when the Federal Reserve purchases government securities. This creates reserves at the Federal Reserve in another bank.

The second kind of lending comes when this bank lends out the money. This is the multiplier effect.

The reason for the excess reserves now is that banks are gun-shy and afraid to lend. Their money is safer at the Fed than with commercial and personal borrowers. When this changes (either by a recovery, or by the Fed penalizing banks for excess reserves, which it can do but hasn't) then we'll see inflation, and a consequential rise in prices.

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    Wouldn't the Fed always be a "safer" place compared to commercial and personal borrowers? Perhaps it's the risk relative to the reward that's not attractive? – Chris W. Rea Jul 14 '10 at 18:55
  • Agreed ... my answer wasn't worded the best. – mbhunter Jul 18 '10 at 2:23
  • @Muro: rayservers.com/images/ModernMoneyMechanics.pdf – mbhunter Aug 21 '10 at 4:37
  • OK...I made a mistake in my previous comment. Typically, when the FED purchases government securities a bank is selling the government bond and thus is the recipient of Federal Reserve Notes - not the government. That bank can then use the FRNs to purchase government bonds if it chooses. Or it can lend out the FRNs. During the crisis the FED bought mortgage-backed securities and other debt instruments. The banks took those FRNs it received and kept them as excess reserves. The question still remains to be answered: are the banks allowed to use the excess reserves to buy government bonds? – Muro Aug 21 '10 at 20:45
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Many terms a'blending here.

"Reserves" in yankee are merely deposits at the Fed by lending institutions, from bankers to brokers.

"Treasuries" are loans borrowed by the US gov't itself, not its monetary authority, the Federal Reserve. The Fed borrows with the cash (zero coupon perpetuities) or "reserves" (deposits) (zero coupon perpetuities).

Yes, when the Fed owns Treasuries, it's like a subsidiary corporation borrowing to buy the parent corporation's bonds, lol.

If a bank wants to hold Treasuries, it holds Treasuries. If it has to keep some assets in reserve, it holds cash or deposits at the Fed. If it needs to satisfy reserve requirements because of an unpredicted insufficiency, it "borrows" "money" "overnight" from other reserve holders. It's a sale, but it's marked as a loan.

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