Remember when that rich guy saved the U.S. economy? No, really. That happened.
The U.S. government came up with $2,000,000,000,000 (or $2T) seemingly overnight in the form of the Coronavirus, Aid, Relief, and Economic Security (CARES) Act. That is a lot of zeros - an incomprehensible amount. By comparison, the stimulus program for the Great Recession (ARRA or the American Recovery and Reinvestment Act of 2009) was about $800,000,000,000 (or $800B). Understanding how the government was able to do this is a reminder that while the headlines are scary and we are living in unprecedented times, many things are responding exactly as needed and intended.
How did the U.S. government come up with $2T?
It is borrowing the money by selling treasury bonds to investors.
In uncertain times, like this, there is a very high demand for treasury bonds. This phenomenon is called "flight to safety." Investors sell out of other investments and buy treasury bonds because they are considered the safest asset that money can buy given their low default risk. For that reason, rates on U.S. treasury bonds are low so the U.S. can borrow money very cheaply. The outstanding bonds will be added to the national debt.
The Federal Reserve (the Fed) also plays a key role by buying bonds to keep interest rates low and money moving.
The Fed is doing a lot right now, but with regards to the $2T of treasury bonds flooding the market, it is buying up hundreds of billions of dollars worth of these and other bonds to keep interest rates low. The Fed doesn't actually "print” money anymore to buy these bonds, although that is still the term used. Everything is done electronically in the form of digital dollar credits.
What did we do before the Federal Reserve, our nation's central bank?
J.P. Morgan (Source: https://en.wikipedia.org/wiki/J._P._Morgan)
It wasn't pretty. During the Panic of 1907, J.P. Morgan (the person, not the investment bank) had to bail out the economy. You read that right. A private citizen had to spend their own fortune to save the U.S. economy. Along with John D. Rockefeller and other men he persuaded, they put their personal fortunes into a "money pool." Banks borrowed from their money pool to stay afloat and keep the economy going. This group of men became the first "lender of last resort," another name often given to central banks, or the Fed.
There are obvious red flags with that scenario. Our country's economy should not be dependent on a rich person willing to save it. If someone were to step forward, they would have an unbelievable amount of influence during and after the fact. Therefore, the Federal Reserve was created in 1913 with the dual mandate of maximum employment and price stability.
Will "printing” money lead to inflation?
It could but it is not a given. It didn't happen with the Great Recession and the risk of it happening in the U.S. right now is very low. One of the Fed's main jobs is to control inflation - their stated target is 2% - and they will use all of the tools in their toolbox to meet that target. Just as they can be expansionary by lowering interest rates and increasing the money supply, they can also be contractionary and do the opposite just as they did as the economy recovered from the Great Recession.
What else do you want to know?
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Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and worldwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors. Follow her on Twitter.