Theory of Money

Just some random thoughts.  What is money?  This question isn't as easy as it sounds.  Land is not money, nor is gold, bitcoin etc (but maybe someday).  These are the types of money:

1. Fed dollars.  Cash in your pocket, obviously.
2. Money on deposit with the Fed.  The average person can't open a checking account at the Fed, but at the risk of oversimplifying, assume that every bank does as well as the US government.  This includes "excess reserves", which are basically locked up and can be considered similar to a CD or bond.
3. US Treasury bonds.
4. Bonds from Freddy Mac and Fannie Mae.
5. Checking accounts at banks.
6. Credit card debt.
7. Loans from banks (but need to offset checking accounts balances).
8.  Stocks and bonds of mega-corporations (i.e. those with a market value of at least $250 billion).
This isn't a complete list but these illustrate the idea.

Who can create money?  All of the issuers of the above.  Individuals create money when they charge their credit cards or use a line of credit.  Banks create money when they make loans.  Mega corporations create money when they issue bonds.  However, all these types of money are temporary (until the loan is paid back) and require some sort of collateral (with the exception of credit cards, but those imply a lien against future earnings).  Even the Federal Reserve dollars require collateral, in the form of treasury bonds.

During the normal business cycle, money is created primarily by banks and businesses.  (Assume for the moment that there is no government deficit spending during this period).  The business cycle is unstable because there isn't enough money to pay both the interest and pay back the loans, and defaults and bankruptcies destroy money.  Money becomes more valuable and is deflationary as loans are paid back or defaulted on.

To counteract this deflation, the Federal Reserve can step in and buy treasury bonds, thus creating more high-powered money in a process called quantitative easing, lend the money to banks at 0% interest, which can then lend out more money at low rates to businesses in an attempt to prime the pump and restart the business cycle.  However, this also requires confidence in the future.  The high-powered money is also deflationary because of interest and maturing treasury bonds.

Which leads us to the U.S. government, specifically the Treasury Department, as the ultimate source of money.  When they issue bonds, they are unsecured.  They are really only backed by faith that they will be able to issue more bonds in the future. (That and taxes).  It is the issuance of bonds that creates the money, not the deficit spending, although the spending distributes the money through the economy.  (Maybe they could issue bonds and do something productive with the money instead?)

Which leads to the insane conclusion that in our economic system the US government is the source of all wealth.  We need more debt and more deficit spending, (although maybe the spending could be done more wisely).  And how long can this state of affairs continue?  Apparently forever (think trillions, quadrillions, quintillions, etc) as long as the rate of increase in the debt is restricted to a certain rate so it doesn't get out of control.  And maybe recessions in this system are planned or at least allowed in an attempt to put a lid on the spiraling hyperinflation.