Feb 28, 2021
Where Does Stimulus Money Come From?
How can the government keep affording multi-trillion dollar stimulus checks and how long can they keep it up?
Due to the coronavirus pandemic, unemployment rates have skyrocketed during March and April. While the economy has certainly recovered over the past nine months, many companies are still on the verge of bankruptcy. Oil and travel companies were probably hit the hardest by this disaster. For example, Boeing had to cut 30,000 jobs — almost 1/5 of their workforce — to deal with the pandemic. To cope with the high unemployment, the Trump administration published the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. The CARES Act mainly focused on keeping small businesses alive and reducing the overall unemployment rate in the United States. It provided $1,200 per qualified person (income less than $99,000) and $2,400 per qualifying couple (combined income less than $198,000) filing their taxes jointly. The U.S. government has also stepped in by reducing interest rates to 0.09% as of January 2021.
How Much Did the CARES Act Cost the Government?
According to the Congressional Budget Office (CBO), the CARES Act cost the U.S. government 1.8 trillion dollars, more than twice the amount spent for the American Recovery and Reinvestment Act of 2009 ($831 billion). The United States government spent more than half of its revenue for the fiscal year 2019 on the CARES Act (52% to be exact), according to usaspending.gov!
Since the government is in charge of printing money, one may think the government could just print two trillion dollars and call it a day. In the short term, this may seem like a great idea, pumping $2 trillion directly into the economy; everyone would have more money to spend, therefore boosting the economy and reviving businesses — right? Unfortunately, this would be a terrible idea during the long run: inflation would kick in, raising prices and decreasing the value of the U.S. dollar. This is exactly what happened to Zimbabwe, a country located near South Africa, in 2007. Many reports are suggesting the government is planning to distribute another stimulus package soon. This begs the question: how can the government fund a second stimulus package while keeping government services running and keeping inflation under control? The answer lies in increasing the fiscal deficit.
What Is a Fiscal Deficit?
The fiscal deficit is calculated by subtracting all government revenue (taxes, investments, and bonds) from the government’s expenditures (Social Security, Medicare, military, and other agencies). The government undergoes a fiscal deficit when they spend more than they make. A higher fiscal deficit might seem harmful, but, in theory, a higher fiscal deficit could boost an inactive or a declining economy. Because of the higher deficit, we, the consumers, will have more money in our pockets. The abundance of money in our pockets encourages us to spend and invest more, therefore boosting the economy. The government will make more money through various taxes, including sales and income tax, due to higher spending and more economic activity. Unfortunately, extra tax revenue still won’t fund, for example, a 2 trillion dollar stimulus package. The government will need an extra source of income. This is where bonds come into play.
Government Bonds
When you buy a government bond, you essentially loan a fixed amount of money to the government. In return, the government agrees to pay you back the loan, plus a little bit of interest for your profit. Most U.S. Treasury bonds last between 5–30 years, but you are allowed to redeem the bond just after 12 months. However, if you do this, you will lose three months of interest payment. Nevertheless, bonds are a great low-risk, low-reward investment that can keep your money from losing value due to inflation. Now, especially with historically low-interest rates, selling bonds to investors is an attractive way for the government to raise money and fund relief packages like the CARES Act.
How Is the Deficit Paid Off?
You may think that, with an ever-increasing national debt of over 26 trillion dollars, the U.S. government is worried about its financial future. In reality, this is not the case; with the current inflation rate of 2%, paying off the debt will get much easier with time. Using the Rule of 72, we can calculate that it will take (only) 36 years for the value of the U.S. dollar to depreciate by 50%. This means that paying off a debt of 20 trillion in 2057 would feel like paying off only 10 trillion in today’s money.
The government also believes that in the future, the economy will be much stronger and larger than today. A stronger economy will also increase the government’s revenue, making debt much easier to pay off over the years. Furthermore, about 23% or 6 trillion dollars of the national debt is owed to the U.S. Treasury, which is like owing money to a cousin — you don’t really have to pay it off.
All in all, with the current pandemic, historically low-interest rates, and ever-increasing national debt, another multi-trillion-dollar stimulus package may seem financially impossible for the federal government to issue. But with the help of various investment strategies and careful planning, the U.S. government can safely inject trillions of dollars directly into the economy without facing the negatives of inflation.
Like what you read? Sign up for our newsletter here.
