When the US government uses emergency funding in the billions or even trillions, where is it getting the money from?
In: Economics
Think of it like this: The US government creates dollars by spending them into existence, and it destroys dollars through taxes.
Government spending and taxes (creation and destruction of dollars) are the two primary ways in which the government controls the number of US dollars in circulation (a.k.a. the money supply).
Physical money like bills and coins compose a tiny fraction of the money supply. Most of the money supply exists as numbers in accounts stored by computers. The government can create money by increasing a number in one of its computers, and then use that money to pay for things like bond coupon payments (the “interest” payment a bond holder receives), infrastructure, a military, civil servants, and social services. Once the money is spent by the government, it’s real. Whoever received it from the government can go and spend it themselves. The dollar is a fiat currency, which means that the US Government has absolute power create more of it at will.
When the number of dollars in circulation exceeds the demand for dollars, then the value (purchasing power) of the dollar declines — that’s simple supply and demand. If the government wants to increase the value of the dollar, it can remove dollars from circulation. It does this by acquiring dollars from others and then destroying them. The main way it accomplishes that is by charging taxes, tariffs, fees, and penalties (I’ll just say taxes from now on). Any situation where you pay US government money results in the destruction of that money: it’s gone back to its source and is out of circulation.
The government does not need to fund its operation through revenue (e.g. tax revenue) because it create money at will. Taxes don’t pay for government services; that’s an illusion. Taxes accomplish two things: maintaining a mechanism whereby the government can uphold the value of the dollar by reducing the supply of dollars, and redistributing wealth. When the government taxes some people more than others while offering services to everyone (and more services to some), it’s engaging in a kind of social engineering. The government could pay for all of its services and never tax anyone because it can create all the money it needs; the downside is that the dollar would decline in value over time and the government would have no way of stopping it (i.e. runaway inflation). When the government decides to destroy certain types of people’s money to a greater extent than others, it’s putting the burden of maintaining the value of the dollar on those who pay the greater share of the tax. And it turns out that those who pay more in taxes usually benefit more from the dollar maintaining its value anyway, so it’s a reasonably fair deal.
This understanding of how the government controls the money supply is called Modern Monetary Theory. It applies only to sovereign governments with absolute power over a currency they issue (i.e. the US Government, but not your state or local governments or individual nations within the European Union).
EDIT: You might be wondering, “What about the huge US government debt then?” Well the government could pay that debt any time by spending the money needed to do so into existence. That’s the wonderful thing about having a national debt which is denominated in the US’s own fiat currency. It would result in a huge increase in the number of dollars in circulation though, which would cause the purchasing value of everyone’s dollars to decline. As long as the value of the dollar is stable, the debt doesn’t matter no matter how big it gets. But once creating the dollars needed to pay the interest on the debt starts putting enough dollars into circulation to erode the value of the dollar, then the government’s in trouble. It will have to remove dollars from circulation (meaning, tax people) to balance the dollars that it created. In practice this may never actually happen. The dollar competes in a currency marketplace against the other currencies of the world, and its value is measured relatively to those other currencies. As long as the dollar looks good compared to other country’s currencies, it’s value will be pretty stable. Like earlier this week the government spent more than a trillion dollars into existence to help deal with the economic impact of the covid-19, but the rest of the world *really* wants dollars right now rather than other currencies so the value of the dollar is at 1-year high.
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