InvestingSuccess

Where does the US government keep its money?

The answer to this question used to be – in the various large banking institutions across America.

But that has changed since 2019. Now the Gov’t keeps its money in the various regional Federal Reserve banks. You can track the ebb and flow of money in and out of the regional Fed banks by looking at the following chart which is always available on the website from the St. Louis Federal Reserve bank.

As the Gov’t collects money from taxes and fees, the bank balance rises. When the chart shows the bank balance to be declining, what is happening is the Govt is maybe paying some bills but for sure the Govt is withdrawing cash from the Fed regional banks and parking it with a select few of the largest, most stable institutions (ie JP Morgan, Goldman Sachs…). These commercial behemoths then lend out this newly deposited cash to earn an interest return. Or, maybe these behemoths use the cash for trading the markets. In any case, when the Gov’t needs some cash to pay bills, it will ask that the big banks to send some of it back to the Fed.

If you look at a chart of the S&P 500, you will see (with a bit of lag) the connection between cash flowing out of the Fed regional banks and the general trend of the equity market.

What I do not know is why the Govt adopted this strategy in 2019. Does it not want to spread its money across the wider banking system? Is it afraid that there are too many mid-tier banks out there that are unstable?

I will be watching this chart as it evolves in 2024. Something ‘big’ is apparently happening….