Money Matters

Economics, Banking, Finance, and Supply Chains

How does the US government pay for stuff?

Pay for? Image is of a US government appropriations bill

The short answer is the “pay for ” mechanism of the US government is through a Congressional appropriation.

WTF? They just vote US dollars into existence?

The short answer is: Yes.

A Congressional appropriation is a spending or appropriation bill that originates in the House of Representative. Per the US Constitution, all spending bills must originate in the House of Representatives.

What? Money from nothing? That’s “pay for”?

Contrary to common belief, the US government is NOT funded through taxation or borrowing.

The US Federal government does not have a checking account in the way you probably think. The way you or I do.

They don’t have to obtain US dollars from anyone in order to have them. They simply legislate the money into existence.

When the US Federal Government spend a dollar, it literally comes into existence from nothing and increases the money supply by one dollar.

When they take in a dollar in taxes, that dollar ceases to exist and the money supply is decreased by one dollar.

When most people hear this for the first time (or sometimes the thousandths time), it makes no sense. It didn’t used to make sense to me either.

In fact, I had to hear this over and over for a few years before I had my epiphany moment. And the guy who metaphorically speaking “pushed me over the edge” was an anthropologist, not an economist.

This idea makes sense only when you understand that the US Federal Government is the ISSUER of US Dollars. As the issuer, they don’t have to get them from anyone.

In fact, everyone who has money got it, either directly or indirectly, from the US government, who created it from nothing, literally, after Congress passed a bill requiring funding.

If you think of money like a river (and money is NOT really like a river but this analogy might help), the US Treasury, following the laws passed by Congress, feeds money into this river and takes it out at the other end. Whatever is in the river at any given time is the money in circulation. The money we all us currency users make use of.

Can the US government spend endlessly? That seems messed up

Does this mean the US Federal Government can buy ANYTHING whose price is denominated in US Dollars? Yes, literally.

Does this mean the US Federal Government can buy EVERYTHING whose price is denominated in US Dollars? No, absolutely not.

OK. What is the limit?

The US Federal Government has constraints on how much they can “spend” by which I mean inject into the economy.

The constrain is the productive output of the US Economy.

In order for the Federal Government to buy something, someone in the economy has to grow it, dig it up, make it, or provide it as a service.

When we run out of the ability to provide stuff, we’ve hit the limit.

How do we know we’re approaching this limit? Inflation.

When the demand for something exceeds the supply of it, the price of it goes up.

When there is a general price increase in the economy, it’s because we’re in aggregate not producing enough stuff or providing enough services to meet total demand.

There are then two ways (broadly speaking) we can bring the price back down.

We can make more (increase supply), or want less (decrease demand).

Government policy has been used in the past for both.

To spur an increase in production, Congress can authorize the creation of more money with which to buy it.

If we’re at full employment and simply can’t produce more of whatever, we’ve hit our limit.

Below is a video of economist Stephanie Kelton explaining this idea.

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