How Biden Will Pay for the $1.9T Stimulus Package
Updated: Jan 28
We are no longer in the cycle of borrowing existing money in circulation from foreign nations and repaying the principal or interest. We have entered a new phase of government "funding". The government issues debt and the federal reserve (U.S. central bank) expands the money supply to buy that debt.
This form of government spending doesn't require politicians to raise taxes on its voters. The tax appears in a different form-- inflation via expansion of the money supply.
Please know this isn't a political piece. This is an economic piece. It's important to understand that Joe Biden will pay for his stimulus package, the same way Donald Trump just paid for his, with the aforementioned method mentioned above--expansion of the money supply.
As you can see--Democrats and Republicans are a lot more alike than they realize. Sorry if I made any of you sick.
UNDERSTAND OUR BUDGET
The United States Congressional Budget Office has the following projections for total tax revenue for the year 2020. https://www.cbo.gov/topics/taxes
REVENUE PROJECTIONS FOR FY 2020 (As of September 2, 2020 )
INDIVIDUAL INCOME TAXES$1.5 Trillion
PAYROLL TAXES$1.3 Trillion
CORPORATE INCOME TAXES $151 Billion
OTHER $298 Billion
TOTAL TAX REVENUE PROJECTION2020: $3.2T
Our total tax revenue projections as a country is $3.2T. Our entire countries "spending allowance" is $3.2T. In 2019, before Covid-19, our entire countries expenditures totaled $4.4T.
The United States was running tremendous deficits before Covid-19. Now try to rationalize how the $1.8T cares act stimulus package passed by Donald Trump fits in our 2020 budget. This $1.8T represents more than half of the entire revenue collected. The icing on top was the additional $900B stimulus bill passed in December 2020. Total unfunded stimulus of $2.7T.
Last week, Joe Biden proposed an additional $1.9T worth of stimulus in 2021 of additional unfunded spending. I think its clear how similar democrats and republicans actually are at this moment. For all of the squabbling the irony is unbelievable.
I THOUGHT CHINA WAS PAYING FOR THIS?
Beating the "borrowing from China" drum is going to have to be silenced. In total, China owns $1.05T worth of US debt. This is the TOTAL figure-not how much China loans each year. Not only is the $1.05T figure a worthless sum of money for our countries spending habit, but China has actually been cutting their purchases of US debt. Chinese holdings of US debt are down from $1.24T in 2015 to today's figure of $1.05T.
SO WHERE IS ALL OF THIS MONEY COMING FROM: The Federal Reserve
What is the federal reserve and how does it buy our debt?
Pure and simple, the federal reserve is our nation's central bank. This is an "independent" bank in charge of controlling the money supply. The federal reserve became a much more important figure after the financial crisis in 2009. The government's response to the financial crisis was to rely on the federal reserve's "balance sheet" via a process called quantitative easing (QE).
How does QE work? The federal reserve expands the money supply by purchasing various debt instruments (bonds, treasuries, and treasury bills etc.). The federal reserve claims they do not "hand out" money but rather "loan" money. The purchasing of US debt is how the federal reserve facilitates these "loans". These loans are then placed on the federal reserves balance sheet to be paid back at a later date. The end result of this process known as QE is the expansion of the money supply.
BUT IT IS OK BECAUSE THE FEDERAL RESERVE WILL GET PAID BACK AT A LATER DATE, RIGHT?
Below you can see the federal reserve's balance sheet expanded from beneath $1T to over $7T in 11 years. The federal reserve's balance sheet keeps growing because they don't have the ability to sell these bonds acting as "loans".
The federal reserve can't sell these loans because they are debt instruments. When a debt instrument is sold, the interest rate attached rises, when the interest rate rises, the debt cost more. We simply have too much debt to handle increased debt payments. This is the trap we have laid for ourselves.
IS THIS MONETARY POLICY ACTUALY CAUSING THE DEVIDE IN AMERICA?
First, stop arguing with your neighbor. This is idiotic because both parties are going to continue the expansion of the money supply to pay for unfunded liabilities. The expansion of our money supply (remember quantitative easing) is pure and simple inflation. Ultimately, this is the root of a lot of our problems.
Look at the chart above. Their is a direct correlation between the expansion of the federal reserve balance sheet and the S&P 500. This is no coincidence. After the 2009 financial crisis, fed chairman Ben Bernanke, said the purpose of QE was to raise asset prices and create a "wealth effect".
Housing prices have also seen the QE "wealth effect" as well. We have seen incredible increases in the price of housing. For people that own assets such as stocks and real estate--this has been a tremendous advantage. This segment of the population has ridden the QE wave into the better half of the wealth disparity in America.
The non-asset owners have seen their purchasing power diminish. Rents keep climbing as the value of real estate increases. The higher cost of living makes it more difficult for an American to save. Thus, making it more difficult for the first time home buyers to join the QE real estate wave. To compound this problem, if Americans can't save, they have trouble staying invested in stocks being pressured upward by the federal reserve.
As the asset owners see their net worth increase--the non asset owners see their purchasing power diminish due to the expansion of the money supply. Ultimately, leading to a lesser standard of living. In my opinion, unbeknownst to most Americans, this is the true culprit to divide in America.
WHAT IS AN ORDINARY AMERICAN SUPPOSED TO DO---PROTEST OR INVEST?
Americans seemingly have two choices to combat their angst. They have chosen to protest. They have chosen to protest everything under the sky except monetary policy. When in fact they ought to realize with each day passing the door is closing to secure their future. Everyday real estate, commodities, and stocks keep becoming more expensive. The dollar purchasing power continues to lose value and savings are eroded.
In the past, American's used to invest for retirement. Today, American's will need to invest to keep pace with their standard of living.
John Lawrence is an investment advisor and founder/owner of J.A. Lawrence Wealth Management.