I am not an economist. Any here? I’m trying to figure some of this out.
The federal government receives money from taxes. They do sell a few things, but not much. So, they borrow money to make up the difference between what they take in for taxes and what they pay out. How do they borrow this money? I have some vague idea of how all this works, but I would like to be sure, and I’m no expert.
No, but I did stay at a Holiday Inn Express last night.
So, they borrow money to make up the difference between what they take in for taxes and what they pay out. How do they borrow this money?
Normally, they borrow money by selling treasury bonds. However, the interest offered on these bonds is subject to the law of supply and demand, meaning that in order for anyone to attract $1.5 trillion of investment in T-bills on the world market in a single year, one would have to set interest rates accordingly. So one would be looking at interest rates of around 20% in order to raise that much capital. Repeating that scenario four years in a row makes it even worse.
Yet what we see are interest rates below 3% for those same notes, which means that the government is not actually borrowing this money. Instead, they are simply printing it. That's what 'quantitative easing' is all about. The Fed expands the money supply for the sole purpose of financing government deficits so that interest rates can remain low. The problem now is that interest rates are below the rate of inflation which makes these bonds a very poor investment. So the government prints even more money because no one is purchasing treasury bonds.
Meanwhile, the government gets the tax increase it always wanted without having to change tax rates. Let's say the government increases the money supply by 25%. This results in a 20% devaluation of the currency. So your net worth decreases by 20% while the government gains access to some 'free' money.
Here's a couple of videos that will make it easier to understand:
http://www.youtube.com/watch?v=PTUY16CkS-k
http://www.youtube.com/watch?v=oGIvw7T0GPI