(pleasant orchestral music)
- [Narrator] When the
economy screeched to a halt
in mid-March, businesses
shut down almost overnight,
and quickly, millions of
workers became unemployed.
Within weeks, the government moved
to provide trillions of
dollars of stimulus relief
to workers and businesses
throughout the economy.
- $1200 checks to anyone
who makes less than $75,000.
- This is another $600
a week for four months.
- [Reporter] Congress approving another
$484 billion for loans.
- [Narrator] So where does
all this money come from?
Is it taxpayer funds?
Is the government printing
a bunch of new cash?
As you might expect,
there's a lot more to know.
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Congress can authorize taxes
to pay for new spending,
but that's not where the
stimulus money is coming from.
That money is being
raised through borrowing.
The government expects to
borrow a record $4.5 trillion
for the fiscal year
that ends in September.
That's more than three
times the $1.28 trillion
it borrowed the year prior.
That borrowed money is being used
to subsidize small business payrolls,
send checks to households,
and offer taxpayers a temporary holiday
on making tax payments.
The Treasury Department is
in charge of the borrowing.
The agency borrows by selling
treasury bills or bonds
to the three main groups of savers.
The public sector, like other
parts of the government,
the private sector, which
includes companies or individuals
like you and me, and foreign entities.
These bills are like IOUs,
someone agrees to buy them,
and the government agrees to pay them back
with a little bit of interest.
In the meantime,
the government can use that
borrowed money for stimulus
to support private
individuals and companies,
or state and local governments.
- This year, the federal
government will get
most of its borrowing
from the private sector,
and the reason for that is
because private borrowers
who would normally be competing
with the federal government
for private savings, have
basically disappeared.
- [Narrator] That stimulus money
can make the economy larger
than it otherwise would have been.
It encourages employers
to keep people employed,
and it encourages individuals to spend.
Here's a hypothetical example.
Let's say Congress authorizes
$1 billion in stimulus spending.
The Treasury would borrow one billion
by selling treasury bills.
It would then use that borrowed money
on the stimulus programs,
with the hopes of keeping
the economy churning,
but it doesn't end there.
If the economy keeps moving,
households and businesses
can keep earning income,
and some of that income can be saved,
and in the future, they
can use those savings
to invest in more treasury bills,
supplying the government
with more money to spend.
- The amount of saving in the
economy is not a fixed amount.
Federal stimulus can actually
result in more people working,
more firms having profits, higher incomes
than would have been the case
if there hadn't been any
federal stimulus at all.
This is known as Keynesian stimulus
name for the British
economist John Maynard Keynes
who first came up with the
concept back in the 1930s.
The government is not like a
family that has a fixed amount
and can't borrow more than it can pay back
because it'll go bankrupt.
Government can in effect borrow enough
to actually make the economy bigger.
- [Narrator] Now on top
of the three main sources
of borrowing, there's another source too,
the Federal Reserve.
The central bank is
like the other sources,
but with a key difference.
The Fed can raise funds to buy treasuries
by simply printing money.
- So when we say the
Fed is printing money,
we don't literally mean it's
firing up the printing presses
and creating paper money.
Instead, what we mean is the
Fed basically clicks a button
and credit the Treasury's
account with this money.
It's electronic money,
it's not paper money.
- [Narrator] In effect,
the Treasury sells a bond
and in return gets brand new money.
Right now, the Fed is
ramping up its lending.
Assets on the central bank's balance sheet
topped $6.7 trillion during
the first week of May 2020.
That gives the Treasury
more money to spend
on stimulating the economy
and other programs.
Critics of the stimulus,
say the government competing
with other borrowers for savings
will push up interest rates,
making it harder for private companies
and individuals to borrow and invest.
They also say that if the Fed prints money
to finance the borrowing,
that will lead to inflation
and economic turmoil,
like what's seen in Venezuela
and the trillion dollar
notes seen in Zimbabwe,
- It's only a problem if
they print and they print
and they print and the
those dollars gets spent
and spent and spent again,
until all that spending far exceeds
the supply of goods and
services in our economy,
that's when you get high inflation.
How will we know that's happening?
Well, we probably see long term
interest rates start to rise
as investors get ready for
the approach of inflation.
Then we'd start to see
actual inflation rise,
but we're not seeing that now.
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