Those dollars sitting in bank accounts used to pay for the bonds, Well they came from government spending itself, where else could those dollars come from ?
Did the buyers just print them up in their garage ? Of course not.
Now to this point where does the government come up with its money if we are no longer on the gold standard and if the fed doesn't fund it ?
Fiat money is simply money by decree, the powers that be and in this case the federal government or more specifically congress decides "Ok now we have this much money!" You know the whole debt ceiling shenanigans business we go through every year like when congress authorizes a trillion or more in spending power well where did that trillion come from ? It came from congress just saying "Now we have a trillion more!" POOF! just like that.
Hey GoldBear did ya ever play monopoly ? Im sure you did go read the directions it says on those directions if you run out of money just write down the denominations on a piece of paper and wallah! You just created some fiat money isnt that fun and easy
Same thing with the government now listen this is not meant to shock you its just a fact its the way it is and by the way that fiat money isnt any more or less valuable than gold in fact if you ask me its probably more valuable than gold because of its portability and utility, but thats a whole other discussion and im not going to get into that right now.
The true value of state money comes from the power of the government to tax and to impose fees and surcharges and other monetary fines and penalties you have to pay those thing because if you dont we know bad things happen and you can only pay in the governments own money thuss this is what creates the demand for money and so many people are subject to taxes and fees it becomes widely held and is exchanged as a unit of transaction,Commerce is conducted in these units and is the basis for all credit money that the banking system creates.
After hearing this you mite wonder well why does the government issue any debt at all ? IF the government can just create money by decree whats the need for selling bonds notes and bills ?
Well thats also just left over from the gold standard. The sale of government securities were used to reduce the amount of cash in circulation limiting peoples ability to demand gold that the government needed.
Today the issuance of government securities functions merely as a tool to manipulate the amount of reserves in the banking system just like in the gold standard days it functions to drain cash or reserves, if reserves kept building up and building up from all that deficit spending interest rates will would fall to zero and that would effect the ability of the federal reserve to conduct monetary policy and maintain a target interest rate.
But anyway nowadays the fed actually pays interest on reserves so the necessity of the government to sell securities really has became an anachronism it just doesn't need to do it but like so many habits i guess its just really hard to break.
