There are a few forms of money in the modern financial system, but not all of them are well known. We all know about currency (paper bills) and bank deposits (the numbers in your checking account). If you reading this blog then you also know about central bank reserves (money commercial banks use to pay each other). These are assets that are considered money in large part because they are both risk free and highly liquid. However, they cannot be used as money by institutional investors or the very rich. A big investment fund would not put stacks of $100 bills in the office, nor place huge sums in a bank account (bank deposits are only guaranteed by the government up to $250,000), and is ineligible to hold central bank reserves. When big money looks for safety and liquidity, they look at U.S. Treasuries. In the modern financial system, Treasuries are money.
In this post I will discuss the structural features of the Treasury market that allow it to become money, how the U.S. Treasury became the biggest printer in town, and what this means for economic growth.Continue reading