The United States owns a printing press that it keeps on the National Mall in Washington, DC. It’s very nice. I’ve seen it.
Our esteemed Treasury Secretary, Steven Mnuchin, has shown you pictures of what happens there. The Government prints money.
If you had a similar printing press in your basement, would you ever be unable to pay your bills, your debts or the interest on your debts?
Would you ever go bankrupt?
Of course not. If you had a printing press, you could pay for anything you wanted.
That’s why the US Federal Government’s finances are not like your household. You don’t own THE printing press. The Federal Government owns it.
Unlike your household, which does not have a printing press, the United States Federal Government will always be able to pay its bills. It will always be able to pay its debts. And it will always be able to pay interest on its debts. No matter what the level of debt or what the interest rate on that debt, be it 1.0% or 10.0%, the US Federal Government will always be able to pay.
Once you understand that the United States Federal Government owns the printing press, you will come to some profound insights.
The first should be THE US FEDERAL GOVERNMENT CANNOT GO BANKRUPT.
Banks will always honor a check from the US Treasury because US Government checks don’t bounce.
In 2001, George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001. The law lowered tax rates across the board for most Americans. But it also did something extraordinary. It showed how the US government creates money.
Along with affecting tax legislation, the US Treasury was ordered by Congress to send Americans a check in the mail. These checks were termed “rebates” and were sent to anybody who filed their 2000 tax return on time. The rebate was up to a maximum of $300 for single filers with no dependents, $500 for single parents, and $600 for married couples.
Essentially, the US Congress signed a law to send Americans a check in the mail. Those checks were honored by citizen’s banks because US Treasury checks do not bounce.
This is how all money is created by the US Government. The United States Congress approves spending and, in turn, the United States Treasury pays for the spending by sending checks in the mail. Congress did not raise taxes to send these checks (in fact, they did the opposite) and they did not order the US Treasury to issue bonds.
Congress wrote the law, the President signed the law and the US Treasury sent the checks. And they could do this because the US government owns the printing press.
Understanding how money is created leads to other insights, which I will discuss in future posts.