Where does $2.3 Trillion come from and who is making the money?

Confused child learns about quantitative easing.

Know the dinner table and Zoom happy hour basics of how money works during a time of trillion dollar bailouts and stimulus checks.

Over the past few weeks, seeing the economic effects of COVID-19 (the Coronavirus Pandemic) and watching the US government assemble a stimulus package of over $2 Trillion into our economy, I have become increasingly curious with how our country’s and the world’s money works… like actually. We’ve seen other economies crash recently — why didn’t they just print more money? Seems to be something we’re capable of doing, but why not others?

So in this time of stimuluses, loans, bailouts and creating newly available cash-on-hand for the American people, I find myself in the “perplexed tilted puppy dog head” position more and more. This curiosity stems not only from my involvement in bitcoin and other digital currency projects, but also from playing a role in this whole money system. Even more so, I want to understand how something works well enough to explain it simply. If the economy were a broken toaster, I would want to take it apart, find the busted coil, understand how it is supposed to work, put it back together, and tell you what I did.

Setting out on any learning and discovery expedition, I know it is always best to narrow in on a handful of simple questions that will help me focus and maximize the value of my research time spent. My hope is to communicate the answers to these questions so that you can not only understand, but also communicate that understanding to others. I know, what a thoughtful guy. A juicy bonus would be that you can sound smarter on your next Zoom happy hour 🍻🖥.

Here’s my questions and what I wanted to know more about:

1. What is the FED and how does it operate?
2. Where does “new” money come from?
3. Why should I care and how might this affect me?

Suggested background listening for this blog post: Cash Money Millionaires

Ok — let’s get into it!

What is the FED?

Firstly, no, the FED is not the US government or a government agency. The FED is the central bank of the United States and its operation is not funded by tax dollars, like many other government agencies. The FED’s decisions are independent and do not have to be approved by the President or by congress. The FED, more or less, does business for and with the US Treasury Department. While not a tax funded agency, The FED does however have a 7 person committee who is chosen by the President and approved by congress called the FOMC (Federal Open Market Committee). So, do your taxes pay for the operation of the FED? No, not exactly. But you do pay for the time that the US spends to appoint committee members, manage and cooperate with it. And we spend a LOT of time working with the FED, especially now in a time of crisis.

The main purpose of the FED is to control the supply of money in circulation and in turn, the rates for credit and loans. This control on cash supply and rates for credit is preeettttyyy much, I am learning, how economic growth and balance actually happens. The FED controls this supply of cash-money in circulation a few different ways. I explain those in this next bit when answering my second question.

Where does new money come from? (emphasis on “new”)

The common misunderstanding and admittedly the one that I held, is that the government is simply “printing new money” when more money is needed by the FED to be in circulation. Yes, sometimes that is still done above normal minting amounts, but not in the way that I had thought. Also, it is the Treasury Department that prints new money and under the supply needs of the FED. They have their own complimentary system of checks and balances that they need to abide closely to. Search “when and why the Fed prints new money” and you’ll find lots of articles titled “the problem with printing money,” “hyperinflation out of control” etc. etc.

It’s also important to know that we started printing paper money that was NOT backed by gold (a store of value for backing paper money) or any other single physical thing all the way back in 1971. Now money is not backed by a single physical thing that we can all look at in a vault, and touch, and sometimes wear in fancy grillz. It’s backed by complicated financial products, bonds and securities, GDP reporting, and other intangible interrelated derivatives of money and value. Man tilts head like a puppy again.

Anyways, you can start to see why Bitcoins and other digital cryptocurrencies which utilize a programmatically limited supply of something, securitized to each individual (not a bank), has become an attractive alternative for making money transactions and value accounting more immutable, transparent and reliable.

So, when we say “printing new money” what we really mean is:

1.) We’re creating higher supplies of money circulation by having the FED purchase long-term securities and bonds from the open market ( including long-term US government bonds that are also on the open market), which 2.) makes our country more flush with cash by injecting back into businesses bank accounts and into the government’s budget, ultimately 3.) finding its way back into national circulation by way of loans provided by the banks.

This new supply of money hits the market in the form of loans and typically reduces (or at least stabilizes) the interest rates on those loans. The best way that I have found to describe how this all works is with simple supply and demand logic.

More supply of money = cheaper loan rates, because money is in higher supply and thus cheaper.

Less supply of money = higher loan rates because there is lesser supply, relatively higher demand and thus, is more expensive.

Here’s an example of a bond sold on the open market by the US government (remember step #2 up there) to investors and relatable to the COVID-19 pandemic.

In 2017 “Pandemic Bonds” were made available by the FED and US Government for purchase and about $350 Million worth were sold. The bonds were made available to investors and created in response to the 2014–2016 Ethiopian ebola virus outbreak, as an insurance policy if this were to happen again. Those bonds came under scrutiny recently as they had some terms that prevented funds from going to those who needed them unless certain thresholds were met. For example, X amount of people must die before X amount of monies can be released. That served to protect investors in the insurance policy as much as pandemic sufferers. Pretty interesting stuff considering the times we are in eh? Eh?!

So Jeff, this sounds great. I think I get how we stimulate the economy and sure it’s not perfect, but what is? Why should I care? Is there something you’re not telling me, man?!

Finally, why should you care?

Generally, I think that we should all care what our government decides to spend money on because we’re all participating in the same economy and contributing to the value of a dollar.

One universal reason why you might care — you pay taxes. You’re consistently contributing to the funds that are on reserve, ready to be unlocked in times of acute need, to the supply of money that the FED and government operate with everyday to stimulate economic growth, and which the government uses to create new financial products that they sell on the open market to fund more spending.

The problem that many esteemed economists have with this system of economic easing (quantitative easing “QE”) is how, well, the FED and US Government can’t easily make good on repayments to those investors unless the country makes more money, right? That’s how it works, right? I invest in you, you make more money than what I invested and pay you back your investment + we both earn a profit, right?

So why does our national debt, what we owe to investors, keep going up (and up and up and up)?

How can we sell bonds to investors and repay those investments when we continue to spend more that we make 🤔. Interestingly, the national debt can only be decreased in these 5 common ways:

1. Increased taxes
2. Reduction in government spending and expenses
3. Debt or loan restructuring
4. Monetization of debt or selling debt to someone else
5. Default (meaning, we can’t pay you back, sorry)

I like to use the analogy of opening a new line of credit to pay down pre-existing debt that you have accumulated on another credit card somewhere else. And then you open another newer line of credit to make payments on that loan because you can’t pay the balance owed (and so on and so on, over and over again). It’s not exactly a problem that you can hope to solve easily and especially when unexpected emergencies happen (like a global pandemic) that can cost you a lot of money, well then you’re really in a pickle.

The way that I like to think about my role in our nation’s economy is that I am an investor. I invest on every paycheck, not only for roads to be fixed but for the US to be successful in its participation as a business in the global economy. Here’s where it gets convoluted for me and why I care.

I have a mortgage loan, provided by my bank, with an interest rate created by the FED, that they made available by in part buying bonds owned by the government, that I invested in the creation of — by paying taxes to sustain the government’s operation and directly funding creation of these bonds. I guess you could say I care because I am literally eating my own dog food. Where’s my cut, dude!? ;)

Well, I hope you’re now a tad bit wiser about the COVID-19 stimulus package, how it becomes available, as well as how all money becomes available on a daily basis, in the form of loans or otherwise. There is obviously an entire school of thought, attended by the brightest minds in the world who have formulated robust opinions on how a national bank and the economy should operate best. This is just my layman interpretation. Hope that you learned a little and was entertained along the way. Better yet, I hope I stoked you to continue learning about money. Maybe you buy some Bitcoins, idk. ;)

Be sure to check out my resources below, including a Podcast listen on the Pandemic Bond. If you’d like to chat more, please reach out to me on my website here.

Resources

1. What is the FED, how does it work: https://www.cambridge-credit.org/federal-reserve.html?
2. What is National Debt: https://www.investopedia.com/updates/usa-national-debt/
3. What is an opposition to the FED (bop around in these chapters) gclid=CjwKCAjwguzzBRBiEiwAgU0FT0o-S-4YhD3fjlfvcO-ORKGEl79ZTiWt1ZXODtcXDSy1lND8aKTn6xoCUUwQAvD_BwEhttps://mises.org/library/case-against-fed-0/html
4. Short listen on Pandemic Bonds: https://open.spotify.com/episode/2CyndACjNcFH0ZsCH1TL5n?si=jK-UZlRUQOCFPitkW4gYIw
5. Pandemic Bonds: https://markets.businessinsider.com/news/stocks/pandemic-bond-debate-inside-look-world-bank-coronavirus-relief-investment-2020-2-1028906657
6. Where the $2.3Trillion Stimulus goes: https://www.visualcapitalist.com/the-anatomy-of-the-2-trillion-covid-19-stimulus-bill/