Where Does This Magical Stimulus Money Come From?

stimulusmoney

Americans have received over $2 trillion from “the government” with more to come. Since the government doesn’t earn money, but rather just redistributes the people’s earnings, this windfall is taken from somewhere that involves us. How are they doing it, how is it paid back, and what does in mean for you…and your children?

Following what is happening with the federal government’s unprecedented infusion of vast and unimaginable amounts of money into businesses and individuals is like the proverbial herding of cats. It is essentially impossible to understand every aspect of how this works, but the bottom line is we are borrowing from our future selves.

On March 27, 2020, Congress approved the expenditure of $2 trillion for businesses and individuals. Then on April 23, 2020, they passed an additional $484 billion for business and disaster relief. With more on the horizon, we will soon be approaching $3 trillion in government assistance to victims of the pandemic. In fact, Pelosi’s Democrats have just floated a proposal for yet another $3 trillion for states and local governments and another wave of individual payments. Of course, that amount is ludicrous, but a big chunk of it will probably fly. The entire 2020 federal budget is $4.7 trillion, so the stimulus already equates to over half of the annual budget. By the way, the $4.7 trillion budget is supported by only $3.6 trillion in tax revenues resulting in a $1.1 trillion planned budget deficit to be added to our national debt.

Let’s pause here for perspective. Just what does $3 trillion dollars look like? Well, if you stacked $3 trillion in $1.00 bills, it would be over 203,000 miles high or almost to the moon. Laid flat, the stack would circle around the equator 7 1/2 times. If you spent $1.00 per second, it would take you 96,000 years to spend $3 trillion.

So, where is this $3 trillion, and very likely much more, coming from? It’s complicated, but let’s look at it in general terms. The federal government sells government bonds, or IOU’s, to banks which in turn sell them to individual and corporate investors. Since these bonds have the government backing them, along with a reasonable interest rate, there is a decent market for them, especially in these uncertain times. The government will just sell more bonds that they will later have to pay for plus interest.

Now, the question is how does the government pay back the investor in principal and interest that they haven’t budgeted for. Some pundits say the US Treasury will simply print more money. That is not exactly true, although there is some sleight-of-hand here. The Federal Reserve–the government bank–creates digital dollar credits that are as good as cash. These digital dollars will of course ultimately be called for by the bond holders, but, by that time, the government will hope to have enough revenues from taxes and future bond sales to pay the debt. Eventually, any shortfall in revenues to pay off the bonds will be paid by increasing the money supply, or literally printing more money. Unfortunately, printing more money lowers the value of the dollar and hurts the economy.

If you follow this cycle, it becomes obvious that all this stimulus spending will someday come back to haunt us and our future generations. Some of the stimulus money is in the form of loan guarantees that will not have to be spent. But the Congressional Budget Office estimates the bond obligations alone has added over $2 trillion to our national debt which bumped it up to over $25 trillion. Most economists agree that, when any nation’s debt exceeds its GDP–the sum of all annual production or spending in the economy–it should raise all kinds of red flags. Last year’s GDP was $21.7 trillion. Some financial analysts calculate the national debt as $19 trillion, since $6 trillion of it is what the government owes itself. Either way, we must ensure that our long-term position of debt is well below GDP.

I don’t disagree that the stimulus was absolutely necessary to rescue and resuscitate our economy. Perhaps some more is needed. The idiom, drastic times call for  drastic measures, applies here. However, we must be very cautious about future stimulus packages and very conscious of the inevitable payback. I would like to see your thoughts on this.

 

4 thoughts on “Where Does This Magical Stimulus Money Come From?

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  1. This statement / “idea” ‘Drastic times call for drastic measures’ is an outdated and fundamentally flawed concept. It has gotten individuals, groups, communities, states and nations into conflicts and wars completely unnecessarily and has given Mankind a subcuticular fear of governing bodies. Man in the grips of the unknown is usually found in a state of inexplicable fear and disperses mentally and easily so that the correct sources of a ‘drastic time’ cannot successfully be isolated, communicated. and dealt with rationally. Bad situations amongst people and populations are CAUSED, and they are caused by SOMEONE in ‘drastic times’ and we can see this in many instances, starting with any number of historical missteps ex: Salem witch trials and executions, WWII cause given after the (planned) assassination of Arch-Duke Franz-Ferdinand, The War Between The States, The hidden agenda in pre-WWII Germany by German psychiatrists etc., the false reports of WMD prior to and during the Gulf War. Your article was helpful to me in learning what I wanted to learn from my research, as I did know beforehand about how the Federal Reserve can get the U.S. Treasury to print ‘fiat’ money but I do not have any rapport with this ‘Drastic times call for drastic measures’ since the lockdowns were mostly a knee-jerk reaction and were not needed as we have seen through the use of social distancing and facemasks, body temperature indicator testers.

    I carefully researched at length the ‘pandemic’ and what I came away with is that it is a virus of many that inhabit human and animal bodies and is so alike to Influenza that many (in one instance 6,000)
    cases of Influenza were documented as False positive COVid-19.

    Nevertheless good article for the information withstanding the DTCDM.
    Best thoughts to you for 2021!

    1. I agree with you that often panic results in poor decisions creating worse situations than what they are meant to counter. However, I also believe that the “drastic measure” of stimulus money from the government, targeted to the most effective recipients was, in this case, necessary. I confess that more money than needed was distributed because of the inclusion of pork spending. The saddest outcome from past and future stimulus money is that those it benefits will not be the one’s paying it back.

  2. The more I read this article the more I keep coming back to the question, what if the government could sell something? Now just read the logic of this question real quick. The government doesn’t sell anything, it only rearranges and disperses it. If the government had an entity that they could consistently sell bonds to on the sole condition that can’t be repaid until the economy gets better to a certain degree. The bond purchasing entity would probably have to be made up of a board of people of high moral fiber and character value. They would have to start the company or entity knowing that they weren’t going to get rich. They would be sacrificing profits now to ensure that their kids and neighbors’ kids and grandkids won’t be stuck paying for something that we tried to fix. If the government can assuredly sell bonds it won’t have to get the FED to print more money. If they don’t have to print the money our currency won’t devalue. Because the government will need to sell something of some value to pay for the bonds by proxy, the buying entity could develop a technology that would completely change the way we spend money and practically give it away to the public. This would have to be in an industry that people allocate money to on a regular basis like rent, or power and water. Let’s say the company or entity manufactured a technology that rendered how we use electricity obsolete. So much so that no one would ever have to pay for an electric bill ever again. The company could practically give this away to the public and the government could pass legislation for incentives to buy, like rebates and tax cuts. Considering what people have to pay on a monthly basis for water, electricity, and rent, imagine how money could be reallocated to other sectors that really need the money if let’s say, electricity, didn’t have to be paid. If electricity didn’t have to be paid for, the next stimulus check the government needed to send out could be used more on liquidity purchases and services. A lot of them. I understand that there would far reaching implications in the energy sector, i really believe that whatever we’re doing it’s not working. Not only are we paying for it, but we’re stacking the deck against our kids and our kid’s kids. It’s time we try something different.
    Do you think that any of this is theoretically possible, Terry?

    1. I appreciate your response to my post, Steven. I’m not sure I fully comprehend your theory. It seems to me what you are proposing is the government selling debt in the form of bonds, which is, in large measure, what they are doing already. You state the government needs to sell something. You are correct, the government doesn’t have anything to sell, because the government doesn’t produce anything but services. However, it does already sell its debt in the form of bonds. People and entities already buy government bonds as treasuries which, other than taxes, are its only form of income. Those bonds serve the purpose you are proposing which is delaying government payment until “things get better.” Backed by the government, these bonds are considered more secure, but with less return. and are preferred by those desiring conservative investments. Unfortunately, the government bond market can never sustain the runaway spending the nation is doing. As long as we are spending at the present rate, our children and grandchildren are destined to be sacked with paying for our luxuries.

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