Cash is fungible, it flows where opportunity lies. When the government injects money into the economy, it often ends up in private hands, hitting commercial bank deposits and kicking off the fractional reserve lending cycle. This sounds like a win for growth, but there’s a catch. While banks lend with profit in mind under strict regulations, government lending, like the Department of Energy’s $93 billion loan spree before the 2025 inauguration, is driven by politics, not economics. This destroys capital and hurts the economy. Meanwhile, hopes that money market funds (MMFs) could boost bank lending are misplaced, as GENIUS Act-approved MMFs are tied to government debt. Let’s unpack this mess.
When the government spends or lends, that cash doesn’t vanish—it lands in private sector pockets. A contractor paid for a bridge, a company receiving a loan, or a worker getting a subsidy all deposit those funds in commercial banks. As of 2025, U.S. bank deposits total $18 trillion, per Federal Reserve data, fueling $13 trillion in loans. This is where the magic (or trouble) starts: deposits trigger the fractional reserve system, amplifying economic activity.
Here’s how it works: A company deposits $1 million from a government contract. The bank keeps a fraction (say, 10% for safety, though reserve requirements are 0% since 2020) and lends $900,000 to a manufacturer. That manufacturer deposits the loan, and their bank lends $810,000, and so on. This “money multiplier” historically turns $1 million into $3-$5 million in loans, powering jobs, homes, and businesses. It’s the economy’s heartbeat.
But not all cash injections are equal. Banks lend based on creditworthiness and profit potential, constrained by regulators like the FDIC. Government lending? That’s a different story.
Between Trump’s 2024 election and his 2025 inauguration, the DOE pushed out $93 billion in loans and guarantees, often to companies with shaky or nonexistent financial plans. Unlike banks, which aim to earn interest and recover principal, government lending prioritizes political goals—green energy, job creation, or campaign promises.
Take Solyndra, the infamous 2011 solar flop. The DOE loaned $535 million despite clear risks, and when Solyndra collapsed, taxpayers ate the loss. These missteps destroy capital, reducing resources for productive investments. A bank would’ve sniffed out Solyndra’s weak balance sheet; the DOE ignored it for optics. This kind of lending distorts markets, crowds out private investment, and drags down growth.
Some argue MMFs could channel cash to banks, boosting lending. But the GENIUS Act restricts approved MMFs to government debt, cash, or short-term deposits. About 75% of their assets are government securities, per 2025 Treasury reports. This means MMF cash largely stays trapped in public debt, not private sector deposits. Unlike bank deposits, which spark the money multiplier, MMF investments in Treasuries don’t fuel lending. It’s a dead end for credit creation, echoing the sterilization problem in stablecoin laws like GENIUS and STABLE.
If government lending or MMFs don’t spark private lending, the Federal Reserve could try quantitative easing (QE)—buying bonds to flood banks with cash. But QE inflates the Fed’s balance sheet, risks runaway inflation (a hidden tax on your savings), and shifts debt to the public sector. Post-2008 QE ballooned the Fed’s assets from $900 billion to $4.5 trillion by 2015, and inflation spiked in 2022-2023 after pandemic-era QE. More QE might juice lending short-term but burdens taxpayers long-term.
Cash is fungible, and government injections often flow to private sector deposits, sparking the fractional reserve lending cycle. But political lending, like the DOE’s $100 billion pre-inauguration binge, wastes capital on unviable projects, unlike profit-driven bank loans. MMFs, constrained by the GENIUS Act, won’t save the day, they’re too tied to government debt. QE could help but it fuels inflation, another hidden tax.
This misallocation hurts everyone. Capital destruction from bad government loans means less for businesses, higher borrowing costs, and slower growth. By 2028, if political lending persists, we could see a 5-10% drag on GDP, per economic models, risking stagnation.
What can you do? Demand that the GENIUS Act be modified to avoid draining deposits and subsequent lending from the banks!
Subscribe and follow me on X (@Hoganator), LinkedIn, and my blog for more on how government cash moves (or misfires). Next up: the clash between public spending and private growth—don’t miss it!
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