Where's The Money Coming From? -- Part 1

 

On last night's (Friday Mar 27th) show, Tucker Carlson asked a very important question regarding the $2.2 Trillion Corona Virus bailout package.  He may not have realized how important the question was when he asked it.  He asked "Where's the money coming from?" and then offered that it might be money borrowed from China.  It may be worth a moment or two to ask (again) the question people shy away from asking — perhaps from some inbred instinct that they're not going to like the answer: Where does the government get its money in the first place?

All the money the government spends comes from three sources:

• taxing
• borrowing
• printing

All of these things hurt the economy and the people for whom the economy exists.  In fact, government spending, because it is funded by these methods, hurts the economy and the people for whom the economy exists.  I addressed this issue about 10 years ago right here on this blog where I suggested we were on the verge of a financial catastrophe the likes of which we had never before seen.  And we're intent on doing it again.  Why are taxing, borrowing, and printing money bad for the economy?

Taxing:  When two people make a free exchange of goods, whatever form those goods may take, profit ensues.  Each participant in the exchange wants something the other has and values it more highly than what they already have.  I have $5, you have a cake.  You think the cake is worth less than $5 and I think the cake is worth more than $5.  When you make the sale, you now have $5 — which is better than just a cake — and I have a cake worth more than that five-spot I just gave you.  We both profited.

Then the government steps in.  It snags a few percent off the top as sales tax, and some of that profit has just evaporated because the actual price I paid has been artificially inflated.  You don't get off scot-free, either.  All the material you put into making that cake you had to buy from people who charged you sales tax for the flour, the eggs, the sugar, and everything else that went into it, plus you're going to pay income tax on the $5 you got from me.

The act of taxing is like tapping the brakes on your car: it slows the process down, perhaps imperceptibly, but the slowing happens even if you can't detect it.  Multiply this drag by millions, billions, or trillions, because it happens each time a taxable transaction occurs.  The actual slowing is the removal of profit.  What profit each of us made has been transferred — some of it, all of it, or more than that — to the government so that it can be spent on things that have nothing to do with that cake.

Borrowing:  Whenever you borrow something, the intent of the lender is that whatever was borrowed will come back eventually, and often with interest.  There are certainly cases where borrowing, even at interest, is a good thing.  That's why there are mortgages on homes.  When borrowing happens in order to increase one's productivity, the increase in productivity is expected to be greater than the interest and thus enable the loan to be paid off over time.  The greater the increase in productivity, the easier it is to pay off the loan, but it still involves transferring profit to the lender.  The borrower trades future profit for current advantage.

That, alas, is not how government borrowing usually works.  Government borrowing is a way of 'kicking the can down the road'.  The loan will be paid off in the future when the politicians who borrowed it have retired, and 'paying the loan back' is somebody else's problem.  The 'somebody else', in case you haven't figured that out, is you.  The government doesn't want to tax you in the current cycle for current budget needs, so it taxes you in the future at higher rates.  As I said: somebody else's problem, but the effect is the same: a drag is imposed on the economy.

Printing money:  Most people think money is wealth.  How wealthy am I?  Let me see what's in my wallet.  But that's not wealth.  The true measure of wealth is "what can I do with this money?"  If a haircut or an oil change costs $300, how far will your $100,000 retirement fund take you?  That's what 'printing money' does.  It shaves a little bit off every dollar in circulation and transfers it to whoever owns the printing press.  In lots of cases, the effect is so slight that it's virtually unnoticeable, but over time the effect is cumulative.  In the past hundred years or so, approximately 95 cents has been shaved off the dollar.  That's why 1920 prices seem so bizarre to us.  Cars being sold for $600; gasoline at 7 cents per gallon; houses for $4,000!

In days of yore when 'money' was based on something solid like gold, evil rulers would 'tax' by shaving a tiny sliver of gold from the edge of a coin.  In modern times, governments just inflate the currency.

So, Tucker Carlson asked the right question: "Where's the money coming from?".  The answer is that the government is going to inflate the currency, make each of your dollars worth a tiny bit less, make each of the things you buy a tiny bit more expensive.  Whether they do it by taxing you (unlikely, since they're writing $1200 checks to every taxpayer) or by borrowing, or by simply printing enough extra dollars, the effect is the same: starting tomorrow, life is going to get more expensive.