It spends like money and is denominated in dollars, but so are grocery coupons. It is only “money” within the banking system. It won’t purchase bonds or pay taxes, but its main shortcoming is that it won’t retire the debt that created it. It moves resources ahead in time in return for interest. One cannot move money forward in time for later use, even if one is the government taking your money for Social Security or Medicare. This means those resources are inflating at the rate of interest paid for their immediate use, regardless of what the Fed claims the rate is.

No one appears to understand that they are wringing their hands and clutching their pearls over less than 10% of the total economy when they blame the government for a lousy economy, but the government makes the rules and supplies the means to retire private debt when it spends more than it taxes back. The Fed and the banking system by extension is a creature of Congress. Congress has the authority to mandate the interest paid as well as how much high power money it will allow the private sector to keep, and who in the private sector gets to keep the bulk of that.

Fractional reserve banking went away in ’34 when domestic convertibility of the currency to gold was abandoned. However, most banks will only loan 80–90% of the value of the collateral as part of the vetting process for borrower qualifications. This, they assume, will cover enough defaults to prevent a reserve crisis that might arise in areas hit by unemployment. We saw in ’08 how little it actually takes to topple the market when deception creeps into the loan origination process.