You are a free subscriber to Me and the Money Printer. To upgrade to paid and receive the daily Capital Wave Report - which features our Red-Green market signals, subscribe here. Our Financial System is Absurd (Vol. 1)Why the Real World Is Running the Same Loop You Mocked in AI (A.K.A. I have to go sit down and cry now...)
Dear Fellow Traveler, A month ago, everyone on financial Twitter and LinkedIn was losing their minds over circular payments in AI. Everyone was an expert on models paying models…
On tokens paying tokens. Everyone, everywhere, had sudden expertise about the perpetual motion machine built entirely out of math and delusion. It was hilarious. But then I wrote Postcards on Friday and Saturday… and realized the same circular logic runs the American economy. It’s just a bigger and more consequential loop. But when the Federal Reserve and Treasury do it, we call it “routine fiscal and monetary operations.” Let’s explore this loop… The Fed’s own papers confirm every piece of this. And every piece of this is absurd. Step One: Taxes Drain Bank ReservesIf we need to understand why the Fed is printing $40 billion this month… It’s because of what’s coming in April 2026. When corporations and individuals pay taxes, the money leaves commercial bank accounts and moves into the Treasury General Account at the Federal Reserve. You can read the Fed’s research on this flow… A dollar of tax payment reduces banking system reserves by a dollar. The TGA matters in this story because it sits outside the traditional banking system. So, when money moves into it, that money is no longer acting as bank reserves. The banking system gets tighter. Repo markets feel the pressure because there’s less capital used to finance or refinance. Liquidity conditions shift as participants compete for fewer dollars... This does not necessarily cause distress. April tax season is predictable. Banks and money markets know it’s coming. But it does create tighter liquidity conditions, which require “management.” About 99% of the time, this management isn’t due to a financial crisis… or because lenders went crazy. It’s simply because taxpayers paid their bill. Step Two: The Fed Manages LiquidityIf and when reserve levels drop (or are projected to drop in today’s case) and money markets start showing stress, the Fed steps in. It conducts open market operations. It buys Treasury securities. It uses standing repo facilities. It injects reserves into the banking system… from thin air. The Fed openly states it manages reserve levels to ensure the smooth functioning of overnight lending markets. Reuters reported this week that the December Treasury bill purchases are aimed at this kind of liquidity management. But again… the Fed creates reserves out of nothing. Ben Bernanke explained on 60 Minutes over a decade ago that its keyboard clicks to increase liquidity are akin to money printing… Reserves appear on bank balance sheets…. and the tightness from tax season eases. Now, let me be precise here, because critics will say I am oversimplifying. The Fed is not replacing tax payments dollar-for-dollar. It’s managing aggregate reserve levels to maintain what it calls “ample reserves.” That was a key term from the Fed’s rate statement on Wednesday. The Fed targets a level of system liquidity, not a 1:1 offset to specific flows, such as tax payments. But the net effect is directionally the same… We see banking reserves leave the system through taxes, and the Fed creates reserves to keep the system functioning at its target liquidity level. You can call it routine. You can call it technical. Hell, call it plumbing. But the circularity is still there. And it’s blatant as can be… Step Three: Treasury Spends the Money BackAfter this process continues, the Treasury will have tax revenue sitting in the TGA. Eventually, the government spends money. It splurges on contracts, payrolls, subsidy programs, and stimulus. And of course, transfer payments… it comes down to whatever Congress has authorized. When the Treasury spends, money flows back into private bank accounts. But here’s the mechanical part that most people miss. The Treasury spending creates new reserves for commercial banks…. at the same time, it creates deposits for recipients. It doesn’t recycle the same dollars that were taxed. That’s because reserve accounting is not a bucket system. From a flow-of-funds perspective, the effect’s the same. Spending injects reserves into the banking system, and the TGA balance declines. Bank reserves, in turn, rise, and the system reflates. When you step back and look at it, it is completely circular in its aggregate effect. The LoopSo, one more time for the people in the back… Let’s start with taxes draining reserves from the banking system. The Fed then creates reserves to maintain its liquidity targets. Then, the Treasury spends, creating new reserves and deposits. And the banking system ends up with reserves again. Repeat. Doesn’t matter where you start in the chain… This is the monetary system. The Fed and Treasury will tell you this is normal, and they are right. It is normal. It is also a closed loop in which reserves leave, are recreated, and return. When AI models started doing circular token payments, we called it absurd. When the world’s reserve currency does it, we call it monetary policy. So, Why Not Just Cancel Taxes?The question we should ask… after seeing this progression is simple… Why don’t we cancel taxation if the Fed can just print money out of thin air? This is the question that exposes the logic of whatever the hell this system is... I feel that if I can one day get a logical answer here… I should win a prize… Like a bag of chips… If the Fed can create reserves with a keystroke, and Treasury spending creates reserves and deposits in the banking system, why do we need taxes at all? Well… a few things… First, we have to separate operational elements and legal constraints. Operationally, the U.S. government issues its own currency. It faces no solvency constraint in dollars. It can’t involuntarily run out of the currency it creates. This is… comically… how fiat sovereign currency works. But legally, Treasury can’t spend without a positive TGA balance. Congress requires taxes and debt issuance to authorize spending. These constraints are self-imposed by laws… and they are legally binding. The operational side can’t override the legal framework… as much as some Modern Monetary Theorists or people who think the U.S. has enough “money” to house and feed everyone would like. So why do taxes exist? They serve multiple economic and political functions beyond the “funding” story we learn in school. First, they drain liquidity. When you pay taxes, that money leaves circulation. This is one tool that, in practice, manages inflation. If the government spent without taxing, the money supply would expand with fewer brakes. I’m aware that this is very close to the world of Modern Monetary Theory… But they leave this second part at the door… Second, taxes create demand for the currency. You owe your taxes in dollars. You don’t pay taxes in gold or euros… You must pay in dollars. This forces participation in the dollar system. It’s a simple, structured, and quiet form of state power. Third, and I think most importantly, taxes provide political and social leverage. Tax policy shapes human behavior… it is a blunt hammer in society… Tax policy rewards some activities and punishes others. It redistributes income. It funds the bureaucracy that enforces compliance. It gives Congress power over the economy… allowing some to pick winners and punish “losers.” They become a critical element of lobbying spend and of ensuring the centralization of policy from that giant city on a hill that regulates American life worldwide. Fourth, they legitimize fiscal authority. The ritual of taxation makes government spending feel earned rather than conjured. I know… this is all political theater, but political theater matters. So taxes are not primarily about funding the government in the operational sense. They serve economic functions, such as liquidity management and currency demand, and political functions… Politicians and bureaucrats want redistribution and control. Cancel taxes, and you remove the drain mechanism. You remove the enforcement of dollar supremacy. You remove massive tools of social engineering… You also create a legitimacy crisis… The government won’t do that. It’s not because the government needs money to operate. It’s because taxes provide a simple structure that enables power. Editor’s Note: I was going to initially call this article - “Our Financial System Makes Little Sense (Vol. 1)” But the reality is… I can make sense of it… or at least I just did. So, I had to come up with something else. If you’re struggling to make sense of the world around us and why these markets are so resilient to gravity, be sure to check out The Capital Wave Report, the paid version of Money Printer. Each day, you’ll get a full update on the state of the market, our momentum signals, and much more. Join us for 30% off the annual price for so long as you are a member… Now, back to it. The Absurdity Is the PointI’m not saying this is a secret conspiracy. It’s all in the public research. I’m not saying this is a scam in the sense of intentional fraud. This is policy. I’m not saying the people running it are stupid. Maybe the politicians are… What I’m saying is that the circular logic is real, it is absurd when you look at it plainly, and almost nobody talks about it that way. We mock AI for circular payments. We accept the same circularity in our monetary system because we have been trained to see it as sophisticated rather than strange. Both are loops. One gets ridiculed. One runs the global economy. What This Means for Your MoneyHere is where I shift from description to opinion. If fiat money exists within a circular system in which reserves can be created, drained, and recreated at will, then the logical response is to own things that can’t be manufactured the same way. The Fed can create reserves. It can’t create gold, silver, copper, uranium, farmland, or pipeline capacity. This does not mean those assets always go up. It does not mean they are immune to market forces. It does not mean you should sell everything and buy gold bars. What it means is that scarcity has value in a system where the unit of account (the fiat dollar) is not scarce. Productive businesses with pricing power and capital discipline are actually manufactured scarcity. They limit their own share count. They compound returns, and they don’t dilute. Real assets with inelastic supply are another form. No one can print farmland… timber grows at biological rates… not interest rates. Stay positive, Garrett Baldwin About Me and the Money Printer Me and the Money Printer is a daily publication covering the financial markets through three critical equations. We track liquidity (money in the financial system), momentum (where money is moving in the system), and insider buying (where Smart Money at companies is moving their money). Combining these elements with a deep understanding of central banking and how the global system works has allowed us to navigate financial cycles and boost our probability of success as investors and traders. This insight is based on roughly 17 years of intensive academic work at four universities, extensive collaboration with market experts, and the joy of trial and error in research. You can take a free look at our worldview and thesis right here. Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.
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