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QUESTION: Is there limit for federal reserve bank to lend ? I heard fed can lend as much as GDP to not create inflation and if GDP increase fed can lend more . Is that true ?

ANSWER: There is a limit that the central bank can lend, but that amount is difficult to say because everyone is arguing about whether to change it.  It used to be about $16.4 trillion, but now they're talking about increasing it.  This restriction is an artificial one, though.

Raising the debt ceiling won't increase inflation by itself.  There are 2 primary reasons that increasing government debt would contribute to inflation.
1) The higher amount that the government is paying for interest causes them to overpay for government goods, contributing to greater government spending each year (and government spending can contribute significantly to demand pull inflation)
2) The people lose confidence in the ability of the government to pay back their debt, so the government must increase interest rates in order to attract investors to the perceived increase in risk of their debt, and the increase in interest rates cause cost-push inflationary pressures through the higher cost of borrowing.

US government debt is a muddy mess right now because of the way their accounting system is arranged.  With proper fiscal practices, it would be possible to determine which government debt is generating positive returns on investment, and which are generating negative ROI.  Because of they way they keep track of their accounting, though, this isn't possible, so everyone ends up arguing about whether to blindly increase or decrease spending and debt, rather than cleaning up their system so that they can sort-out the bad spending while keeping the good investing.

The reason that's significant is that an investment with positive ROI will not contribute significantly to inflationary pressures since it will increase total nation value and production capacity; that means that there will be no reason for investors to lose confidence, and even though the government is being charged interest, they are still making more ROI than their interest charges, so there will be no inflation there, either.  On the other hand, increasing bad spending will contribute far more greatly to inflation.

So, to answer your question, whether debt increases inflation depends on how they are spending their money.  It also depends on the circumstances of the economy at the time, whether it's booming or busting, but that's for another question.

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QUESTION: Thanks so much . But , is there limit for banks to borrow from federal reserve bank ? Example : banks wants to borrow 22 trillions from the fed in 2013 .

ANSWER: I don't believe there are any laws putting restrictions on the maximum total amount the fed can lend to other banks (called "the discount window").  There's a maximum amount they can lend to an individual bank, sure, but as a total, I think the amount is just limited as a percentage of the federal reserve's own bank reserve, like a normal bank.

If there is, it's an obscure law that puts the limit well above the amounts being borrowed by banks.  Banks typically don't borrow from the federal reserve at all, if they can help it.  In 2003, the federal reserve reorganized its discount lending procedures in order to attract more borrowers.  Using the discount window is seen as a sign of financial vulnerability; as if the bank is having problems, so they don't like to use it.  There are cheaper ways for banks to generate both short-term and long-term funding, should they experience liquidity problems at any given point.

In other words, it simply doesn't happen, so if a law does exist, it's never used and you never hear about it.

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QUESTION: Thank so much . I have last question , you said : (there is maximum amount they can lend to an individual bank ) if I have a bank how can I know the maximum amount my bank can borrow from the fed ?

thank you so much .

Here's a link to the official legal limitations on bank lending.

"(1) The total loans and extensions of credit by a national banking association to a person outstanding at one time and not fully secured, as determined in a manner consistent with paragraph (2) of this subsection, by collateral having a market value at least equal to the amount of the loan or extension of credit shall not exceed 15 per centum of the unimpaired capital and unimpaired surplus of the association.
(2) The total loans and extensions of credit by a national banking association to a person outstanding at one time and fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the amount of the funds outstanding shall not exceed 10 per centum of the unimpaired capital and unimpaired surplus of the association. This limitation shall be separate from and in addition to the limitation contained in paragraph (1) of this subsection."

It is important to recognize, however, that since the Federal Reserve is quasi-governmental, that if a situation were to arise wherein a bank needed to borrow more money from them than these limitations allowed, then it most likely wouldn't be difficult to grant an exception to this rule.  Otherwise, if a bank needs to borrow a lot of money very fast, they just go directly to Congress, which is what happened leading up to the passing of TARP in 2008.

Really, this law applies more to people and businesses borrowing from commercial banks, for practical purposes.


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Michael Taillard


Accepts most economic questions


Consulting with major corporations, government agencies, political organizations, small businesses, non-profits, start-ups, and even individual people. Teaching at universities around the world, and developing original coursework. Performing original research and analysis. Writing books and scientific studies.

American Economics Association

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PhD (Financial Economics; honors) -- MBA (International Business Finance; honors) -- Grad School Certificate (International Business Management; honors) -- BS (International Business Economics; honors) -- AA (Business Administration; honors) -- Certificate (Chinese Language and Culture) -- Trade School (Transportation Logistics; honors)

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