Where Do We Get $2,000,000,000,000?
Keep reading this number with an astonished voice but I feel like I have to do it every single time to it two trillion dollars just like it just stops me every single time. It is a lot of money. Obviously if it saves the economy from collapsing into another great depression it is worth every penny so the number one question. I think that a lot of people might ask when they hear two trillion dollars. They know that the federal government does not have two trillion dollars sitting around. The federal government is already in debt so way. Are they going to get the money in the next few weeks? So okay we can think of this in terms of two buckets very very big buckets. One bucket is money that basically already exists out there in the world. The other bucket is money that is going to be created out of thin air. The magic bucket. The magic bucket was afraid. You were going to say that. Let's start with the money that is already out there in the world basically the US government is going to borrow money by issuing treasury bonds. This is something that does all the time. If you have money in a retirement account you are probably lending money to the US government whether you know it or not investors all around the world are all the time lending tons of money to the US government but these are not normal times the US economy is functionally shutdown. I worry about the integrity of the US government. Why would investors around the world still give money in uncertain times to the US government? Why would they lend money when they could just sit on cash by golder? Yes so Robert. When we set out to work on this show I called up Alan blinder. He was the vice chair of the Fed back in the ninety S. He's a professor at Princeton. And he's he's one of the smartest people I know on this stuff and I asked him that question like why would people buy treasury bonds right now. There is a huge market for. Us Treasury debt for the simple reason that it's considered the safest asset money can buy and this is a time when the safest asset money can buy. Sounds really good. You Bet you know I understand this Jacob and we say this all the time the strength of the. Us Treasury bond is that it is the safest asset but in my heart. I do question whether there are two trillion dollars worth of takers out there. Ready to stand in line for this asset when we need it the most. How do we know it's still true? You know the answer say it you gotTa talk about interest rates. You Bet so right now today the. Us Government can borrow money for ten years at an interest rate of left than one percent a year right so this is trillions of dollars of smart investor money begging to lend money the government at a super super like historically low interest rate basically giving the government money for free because they trust the government so much because they are desperate to lend to the US government because if they were worried at this point like literally if they were worried today about the US government they would charge a much higher interest rate. And you only have to look back at the euro crisis in Greece When Greece needed money investors demanded a very high interest rate the same with Argentina any of these countries in trouble. If you're going to lend the money you're going to ask for ten fifteen twenty percent return if you're asking for less than one percent return you know you're gonNA get your money back. Yeah it is still one of the safest loans you can make on the planet even with all the debt people trust the US government with their money. And if I were to wake up one morning during this crisis and find that the. Us Treasury interest rate had skyrocketed. So that is probably not going to happen. And the reason it's probably not going to happen is actually like the next hole sort of chunk of the show their big thing. Oh it is the other bucket yes. It's the unfortunately named magic bucket right. That is the money created out of thin air bucket. So so now is the part where we talked about the Fed the Federal Reserve America's central that the Fed the Fed cavalry. So you and I did a show last week about the Fed rate so just to be clear the bill we're talking about today the two trillion dollars. That's Congress right. Congress is in the middle of passing that Bill. The president is almost certainly going to sign it. That's like one whole set of things k. The other big thing going on in the world the other big response to this crisis in America at least economically and financially has come from the Fed The feds doing a bunch of things. But what's important for? This show is the Fed is buying tons and tons of treasury bonds which is to say the Fed itself is lending hundreds of billions of dollars to the US government. And and you know one question. I had here for for blinders. Wait if everybody around. The world is so eager to lend the government. Why does the Fed need to be getting in on doing it to the Fed is GonNa do that? To the extent it is necessary to keep interest rates from going up so in other words if everyone in the world is clamoring to lend money to the US government interest rates. Stay low. That's great but if people get nervous about the United States then the Fed is there to keep buying to keep that rate. Low argued example if you went back to World War. Two which is the last time really. We had a mobilize the where we have to mobilize now. It does feel like right. I KEEP COMING BACK TO WORLD WAR. Two I you should so in World War Two. The Fed was very explicit that they were going to keep the interest rate on government bonds. Very very low for the duration of the war. And that's more or less what they're doing now. Is this time. It's the war against the virus. Yes hopefully well. It'll be a much shorter war but it's hope so yeah The Fed has said it's going to lend money to the government without limit. Bright more or less. Where does the Fed get the money? Oh that's the neat part about being a central bank. It doesn't have to get the money. It just creates the money something you and I wish we could do but only the central bank can do that so all of this money these hundreds of billions of dollars the Fed is going to essentially lend to the government by buying bonds. Is that like new money that the Fed is creating new money. That's why it's sometimes we still sometimes use the phrase printing money but this is electron. Ix handover dollar bills to exchange for pieces of paper. That money will be irrelevant to this whole thing. So to recap the two trillion dollar stimulus. Rescue package is being paid for by investors like you and me investors all over the world as well as the Fed making sure that everything runs smoothly and interest rates remain low. Yeah and and what that last part means is the Fed creating hundreds of billions of dollars out of thin air and using them to buy bonds. Now this is where I start to worry a little bit because I remember when I took high school economics. Which was my last sort of formal economics. Train Ish The one thing. They taught us the one thing they taught us was. If you print too much money as a government the thing that inevitably happens is your money which is flooding into the system becomes worth less and you start to see inflate hyper even this. Is The story APOR inflation? They always tell the story of Germany in the nineteen twenties wheelbarrows full of money. Zimbabwe with its trillion dollar bake notes hyperinflation that cripples the entire economy. You can't even put a price tag on an item because it'll go up in two minutes and I mean the short version of what happens is ordinary investors. The people in that first bucket get scared about lending money to the government so the central bank that second bucket they start printing more money to lend to the central government and then investors get even more scared so the central bank prints more money and more and it and it turns into this spiral where inflation just goes up and gets totally out of control and completely destroys money. Basically and that's where you get this crazy. Runaway inflation with prices doubling every week and the value of money completely breaks down. So that's the story and I want to say just as clearly as possible. That is very very very unlikely to happen