Asteroid Money
Tags: economics, money, spending, reserves
Published: 2022-09-26 03:17:10

- [Financing Asteroid Money](#financing-asteroid-money)
- [Reserve Banking System](#reserve-banking-system)
- [Money Making](#making-money)


> In 2005, Congress set a mandate for [NASA](https://en.wikipedia.org/wiki/NASA) to find, by 2020, 90 percent of near-Earth asteroids that are big enough to destroy a city -- [Kenneth Chang, New York Times](https://www.nytimes.com/2022/09/25/science/nasa-dart-asteroid.html).


Today, [Kenneth Chang](https://twitter.com/kchangnyt) wrote about NASA's intention to dislodge an asteroid in outer space tomorrow night. This was a unilateral decision made by a branch of the US Government that is supposed to benefit all of mankind.

While global governance is difficult, there's definitely no global mandate for this activity. That notwithstanding, economic resources (i.e. materials and labor) were allocated to make tomorrow's experiment a reality.

Those economic resources are financed by **asteroid money**.


## Financing Asteroid Money

The [Congress of the United States of America](https://en.wikipedia.org/wiki/United_States_Congress) decides on a shopping list [every year](https://www.usa.gov/budget). Then the US Treasury goes shopping. However, in 2005 the US Treasury didn't have any money in its coffers to finance the  materials and labor required to dislodge asteroids.

Its coffers had been empty [since 2001](https://en.wikipedia.org/wiki/History_of_the_United_States_public_debt#:~:text=According%20to%20the%20Congressional%20Budget,the%20national%20debt%20still%20increased). That was the last time the Treasury Department had more money to spend than it received from the public in taxes. 

Since the federal government was _broke_ in 2005, it had to borrow that asteroid money. While the [Bureau of Engraving and Printing](https://www.stlouisfed.org/open-vault/2017/november/does-federal-reserve-print-money#:~:text=paper%20currency%20comes%20from%20the%20U.S.%20Treasury%E2%80%99s%20Bureau%20of%20Engraving%20and%20Printing) at the Treasury Department is responsible for printing US dollars, asteroid money doesn't come from there. 

Although the Treasury Department could just print currency and hand it out to suppliers of needed goods and services, that's not the way it's done. Currency isn't needed because we have a  banking system. It's a particular type of hub-and-spoke banking system called a fractional reserve banking system.

## Reserve Banking System

The funds allocated to pay for the scientists and materials needed at [independent agencies](https://en.wikipedia.org/wiki/Independent_agencies_of_the_United_States_government) of the United States federal government (like NASA) come into being because the Federal Reserve, or central bank of the United States of America, creates it. 

They do it to expand the money supply on behalf of the federal government. The central bank (or **Fed**) initiates the money making process through the [Federal Open Market Committee](https://www.federalreserve.gov/monetarypolicy/fomc.htm) (or **FOMC**). [1]

What ends up as asteroid money is the direct result of the FOMC purchasing transferrable government debt, and other [financial instruments](https://www.investopedia.com/terms/f/financialinstrument.asp#:~:text=A%20financial%20instrument%20is%20a,cash%20instruments%20and%20derivative%20instruments), through **open market operations**. Open market operations are performed by the [Federal Reserve Bank of New York](https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/treasury-securities/treasury-securities-operational-details). Only [specially approved financial institutions](https://www.newyorkfed.org/markets/primarydealers#primary-dealers) can lend directly to the federal government and the Federal Reserve is definitely never on that list. 

As Orwellian as open market operations seem, they allow the Fed to do what banks love to do. They create credit for profit. In this particular case, the Federal Reserve acquires the debts (or **liabilities**) of the federal government and exchanges them for their liabilities (aka **legal tender**). 

The Fed turns debt into dollars. They effectively print money without directly financing the federal government. [2]

The federal government's debts are fungible and transferrable loans called US Treasury [securities](https://www.investopedia.com/terms/s/security.asp#:~:text=Securities%20are%20fungible%20and%20tradable,aspects%20of%20debt%20and%20equity) (or **treasuries**). Other banks compete with each other to lend to the federal government by acquiring treasuries.

They can then sell those treasuries to the Federal Reserve. The Fed then credits those banks with reserves and _voilà!_ Money is born.

Certainly, these banks can hold the treasuries on their balance sheet for the income the government promises. They don't need to turn them into money. However they tend to have a profit motive driving them to sell treasuries for reserves.

Reserves are the US dollar denominated liabilities of the Fed. That matters. By fiat, that debt is money. Banks are motivated to lend to the government so that they can increase their capacity to make money.

## Money Making

Money making is a two step process in a fractional reserve banking system. The Fed first transforms government liabilities into reserves and then banks leverage those reserves to lend money to the government for a profit.

Banks assess creditworthiness to earn much more lending to the public than they would lending to the government. However, the Fed is always constraining their ability to lend. And that's the whole point of the fractional reserve banking system. The Fed prevents banks from lending excessively by demanding that they always have on hand a fraction of money that only the Fed has the right to issue.

It's gangster stuff.

But thanks to banks lending to the federal government, the Fed ends up lending reserves back to those very same banks that lend out many multiples of those reserves as bank deposits.


The result of this rigmarole is that asteroid money is eventually credited to the bank account of NASA's suppliers of goods and services. Before you know it, currency held in bank vaults or held in deposit at a [Reserve Bank](https://www.federalreserve.gov/aboutthefed/federal-reserve-system.htm), is empowering NASA to destroy unwitting asteroids on behalf of all humanity.

[1] This article is about the creation of modern money because I spent the weekend hanging out with [L. Randall Wray](https://www.levyinstitute.org/scholars/l-randall-wray) and want to reflect on what he was saying. Note: This article is not about the appropriations process nor do I try to trace the specific process through which the government pays NASA scientists.
 
[2] Although the Fed is the federal government's banker, I believe that a direct link between the a government and its central bank has resulted in fiscal profligacy in other jurisdictions. Governments like the Weimar Republic's and Hitler's tended to prefer spending over prudently managing the money supply. 

[Check out Liaquat Ahamed's "Lords of Finance" for further information. It's my favorite historical account of fiscal profligacy. **Note:** Amazon gives me the hookup if you click on the link below. If you aren't cool with that please search for the book yourself on Google.]

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