The dollarverse

I have probably blogged on this before, but I want to state this a different way.  First, I will use the term "cash" to mean Federal Reserve Notes, "dollars" to be interchangeably with "money that is denominated in dollars", and the term "dollarverse" to mean the total amount of dollars.

The Fed does not create dollars.  They are mostly created by the US Treasury when it deficit spends.  When the Fed creates cash to buy up Treasury bills as part of quantitative easing, it is merely exchanging a more liquid type of dollars for a less liquid type, but the total does not change.  Imagine ice melting (although this is not a perfect analogy since when water freezes it expands).

Banks also create dollars when they make loans.  The accounting entry is a new liability on their book for the amount of the money newly placed in the checking account, and a new asset in the form of a note receivable.

Dollars are destroyed when loans are paid back or when the government runs a surplus. Also when debts are written off or when someone declares bankruptcy.

So what is the size of the dollarverse?  It is much larger than M2 since bonds should also be included.  As well as things like brokerage accounts, life insurance reserves, and accounts payable.

The Fed tracks this as series FL894090005.Q and the current value (2011-Q3) is 152326.7 billion, i.e. $152 trillion.  So the $1.3 trillion deficit is less than 1% of all financial assets and is almost a rounding error in comparison.  Note that this value was 151625.6 billion at the end of 2007, so the current total is only about 700 billion more than it was 4 years ago.  If there had been no deficit spending the number would have shrunk.