Where Does This Magical Stimulus Money Come From?

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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 forĀ  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.

 

Three Cautions About Your Stimulus Money

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The stimulus checks or electronic deposits are starting to come in. This windfall creates a question we all wish we would have more frequently: What do I spend this on? It’s a welcomed question, but it should be given serious consideration. Here are three stimulus spending guidelines I encourage you to think about.

Most importantly, avoid spending it on something frivolous or selfish that you don’t really need. Some new tech toy or extravagant piece of jewelry that you haven’t even considered before won’t be very helpful if the pandemic and economy don’t recover as soon as predicted. You may find yourself short of money later. If you don’t have a reasonable source of emergency funds, better keep your stimulus money untouched and handy for a while. If you are comfortable with your emergency fund, spend the stimulus on something you need, but just haven’t been able to afford. Paying down any credit card debt would save a lot of money, too.

There is also an ethical and patriotic aspect to the stimulus cash. By its definition, you are getting it to “stimulate” the economy. Therefore, it comes with an implied obligation to return it back to the economy. It is meant to boost the bottom lines of retailers, manufacturers, and institutions that put Americans back to work. So, using the money for investment or long-term savings violates its purpose and is simply not good citizenship. It is meant to be spent in the short term. Even spending it on something you’ve already budgeted for is actually saving it, since the budgeted money will be saved.

Finally, consider this as an opportunity for benevolent giving. We all wish at times we could help others in need but just don’t see how we can afford it. Well, now you have some money you didn’t anticipate. So, what better time to be a Good Samaritan to a person or organization that needs it more than you do? I believe we should always follow the Bible’s instruction to tithe, or give 10% of our income, to the Lord’s ministry through His church. That is a given for my family and me. But I plan to give an additional 10% of this stimulus money to someone or some group worthy and in need. I encourage you to do the same.

It would be presuming of me to tell you how to spend your money, but I am just offering some food for thought. Before you spend that check or deposit, ask yourself whether you, others, and the nation’s economy will benefit by your plan for spending it. Remember, it is not meant for your pleasure, but for you to use as a tool for the good of all Americans. What will you do with your stimulus cash?

 

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