Where Does All Government Money Come From?
With so much talk of stimulus checks and a potential second relief package discussed in Washington, we at Fingercheck thought to answer the question, “where is all this money coming from?” To do that, we looked at money pumped into the economy by way of stimulus checks, PPP funding, and small business lending programs.
Now, most people assume that the government funds all this spending with the taxes they collect. However, things don’t work exactly like that.
In the United States, we run a deficit. This means we spend more than we take in. So, where does all the money come from? Simply stated, we borrow it.
A Spending Trifecta
The three key players to be aware of in this spend/borrow dynamic are Congress, The Treasury Department, and the Federal Reserve –better known as, “The Fed”. Let’s use the last stimulus check as an example. So, Congress wrangles over the legislation and authorizes the bill for your $1,200 check. It’s then passed along to the treasury department. The treasury issues bonds, bills, and notes which are essentially just IOUs. This acts as a “promise” to pay back the borrowed money later, with a small amount of interest.
The buyers of these IOU’s, who provide the loaned money, can be anyone: individuals institutions, sovereign governments, etc. However, the big one that everyone talks about is the Fed. The Fed is an interesting buyer of these IOU’s because it has the magical power to create money by clicking a button on a screen. They can credit the treasury department with the money. Thus purchasing the IOU’s and purchasing the bonds, T-Bills, etc. and credit the treasury with the money. The FED then holds those IOU’s on its balance sheet as assets. Now, because of this common practice, the balance sheet has ballooned to over $7T. This causes some to worry that we may be heading toward inflation as a result.
The Question of Inflation
In simple terms, inflation occurs when you have too much money chasing too few goods. At the moment, we don’t have that problem. Much of the funding that went into the stimulus spending, is being used to plug a hole that existed due to the pandemic. However, the concern is that in the future is if the government does not know when to pull back on all of these programs or pull back on the size of the fed’s balance sheet and its money-printing activities. In that case, you may have a situation where there’s too much demand and not enough supply which leads to prices rising and that is the inflation that we want to avoid.
So, where do tax dollars go?
Now, this begs the question, “where do tax dollars go?” Well, that’s easy. The majority of tax dollars help fund defense, Social Security, Medicare, a variety of health programs, and social programs like disability payments and food stamps. A portion of it, (or what’s left) goes toward paying off the interest on the national debt. And with a debt of over $7T, it seems like we’ll be paying it off for quite some time.