Firstly, let's get some facts straight - The US government didn’t print 40% of the circulating USD in the last 12 months. In fact, most of that money wasn’t printed at all. The US government approved massive stimulus funding ($6.55 trillion in 2020) that was used to keep markets afloat and prevent the economy from a severe crash. But where did all this money go? Well, most of it is still with the government but in different forms. The government used this money to buy back assets and treasuries from banks that they wished to sell. This helped the banks remain afloat and escape massive losses. It is important for the banks to escape these losses or else we’re looking at a wide-scale deflation of the value of the US dollar and potentially the crash of banks with not enough liquidity (available cash at hand).
But the US government technically owns these assets/treasuries and they can always sell them back to the banks when the current prices match those of pre-March 2020. Hence, the money was created as a way of making a buffer that allows the economy to absorb losses while it recovers. Most of this money doesn’t exactly go into circulation within the public and remains electronic.
Don’t believe me? Go ahead and check the print order archive from the Federal Reserve. They only printed notes worth $146 million in 2020 (https://www.federalreserve.gov/payments ... orders.htm). For comparison, the Treasury printed $206 million in 2019 and $233 million in 2019 (more than 2020).
What are the outcomes of this effort by the US government? This article by William Meehan in Forbes puts it very succinctly:
But if you prevent the deflation, it would create inflation like we’re seeing now. Then why is it not a big deal for the US government to keep printing money? There are two answers to this question:“In short, the Fed’s “excess reserves” became new and high-quality assets of the banks. The popular term for what the Fed is doing is “printing money,” and at a rate rarely seen before; in fact, most of this printing is by the banks.
“This process repeats itself; every time this happens the banks are able to purchase the unwanted assets of other market participants, using their money creation powers to do so, backed by their ‘excess reserves” with the Fed. In turn, the Fed purchases these assets in return for providing further increased “excess reserves” to its banks.
“The effect of the Fed’s actions has been to keep interest rates lower than they would have been, benefiting all borrowers, including the Government, in the process.
- The first answer is covered by Meehan’s article and largely focuses on the fact that the USD is a global reserve currency and has a very strong position in the global economy. Most countries actually buy the treasuries of the US Federal Reserve in order to make transactions since it’s the central currency of transactions across the world. Hence, the USD is not at the risk of a strong deflation or inflation in the near future. The US government still holds the treasuries that it bought back from the banks and has a strong capability to sell them in the future.
- The second answer is informed by socio-economics and the basics of investment. By creating a stimulus and providing money to its citizens and banks, the government is technically ‘investing’ in them with a hope that the people and the banks can recover from their losses and create an economic output that matches that of the stimulus (or more). Without the stimulus, recovery is harder and more time-consuming, possibly leading the US economy into a long-term recession since the output is less.
- I agree with many people’s opinions that this stimulus creates social inequity and is not fairly distributed across the economy. But then, without the stimulus, the social inequity would deepen even more since a middle-class American is unlikely to be able to take a hit from the recession, unlike rich people. So it may not be the best solution but it is a solution.
What about all the inflation right now?
The current inflation of prices in the US economy is a problem but it’s not directly connected to the spending of the US government, like most politicians’ twitters might insist. In fact, inflation is driven by consumer demand and spending. Coupled with this increased demand are the shortage of labor and raw materials. While the demand for goods rose very sharply as we moved into 2021, the labor shortages created during 2020 can’t be filled at the same time. Think about it — You can order something on Amazon within seconds but can you hire enough people to process that order within seconds as well? No, you can’t. Labor shortages slow down logistics which leads to shortages but it’s not a dead end. People get hired and logistics move.
As labor shortages ease, so do logistics and supply. What happens when the supply goes up but demand doesn’t? The price goes down! Well, it’s not that simple in today’s world but you get my point. Here are some important highlights from a well-informed article (although not a well-informed title of the article) written by Caroline Valetkevitch at Reuters.
But the US government is under so much debt!“Recent economic data has underscored the tightening labor market trend. The latest data showed the number of Americans filing new claims for unemployment benefits dropped to a 19-month low in the week ended Oct. 16, marking a second straight week that claims remained below 300,000 as employers hold on to workers amid an acute labor shortage.:
“So far this reporting period, stronger-than-expected earnings have raised the year-over-year profit growth forecast for S&P 500 companies to 34.8%, up from about 30% at the start of the month, according to IBES data from Refinitiv.”
“To be sure, a labor shortage is good news for people out of work and looking for a job. And there are several signs that suggest the labor shortage may be temporary, Thomas Lee, managing partner and head of research at Fundstrat Global Advisors, wrote in recent note”
That’s not exactly a problem. Most countries around the world are in debt, some more than others. The meaning of this debt is very different at the level of government compared to the level of a nations’ citizens. This is where it gets complicated so you can search this more yourself if you’re curious.
Another very important point to note — Most funding bills approved by the US government don’t immediately add to the debt. They add to the debt over time and usually get counteracted by the returns received in taxes and bond yields.
But the Democrats are spending so much money — Yes, but the bills are also accompanied with ways to pay for them. The bipartisan infrastructure bill with a price tag of $1.9 trillion will add only about $280 billion in federal debt over a decade. Given the likely higher bond yields and asset buy-backs, it is not a big deal so nobody needs to freak out on these price tags.
The thing that really matters is the budget deficit/surplus of the government. Since economic output fell in 2020, there wasn’t enough output for the US government to tax and collect money. Hence, the budget deficit rose sharply in 2020.
While we’re at it, let’s clarify something very quickly. The spending of the US government adds to the debt but not the deficit directly. So technically the government can keep spending money as long as there’s a return in sight. The surplus is affected by economic output and jobs (which are improving). Some people like to tweet the budget deficit as a figure to scare people and tell them that it's a debt that their kids will have to bear (again for political intentions). Unfortunately for their polarizing intentions, government debt isn’t borne by the citizens unless it gets massively worse and to the point that the country can’t pay it because it’s not producing enough economic output. (Like it almost happened in Argentina last year)
Even when things get seriously difficult (which is very unlikely to be the case for a massive economy like the US), solutions are made and executed, as they did in Argentina last year. Most people recruited to the Federal Reserve and Central Banks around the world are highly qualified economists who understand the complexities of global economies much more than you and me, and they have the tools and the ability to prevent massive crises.
So now, you can go on with your day, not getting affected by any polarizing tweets and TikTok’s that might have scared you otherwise. The economy will recover over time and there are enough signs for it. While it’d be interesting to see if the USD will remain the global reserve currency for long, it’s not changing anytime in the next decade (Sorry crypto enthusiasts).
