4 ms·
Practically speaking the way the government prints money is by creating treasuries that the Federal Reserve purchases. When the federal reserve purchases them,
by opportune 4y ago
Practically speaking the way the government prints money is by creating treasuries that the Federal Reserve purchases. When the federal reserve purchases them, the government gets the amount of the treasury created de novo.
With no taxes all government expenditure would be printed money. That would mean the monetary base increases by the government spending per year. That hasn’t been a problem until recently because only a portion of the government was funded this way, and increasing the monetary base wasn’t (until it did) causing inflation above Fed targets.
Let’s say government spending is 25% of GDP. The federal reserve has our monetary base at around 5.5T out of 20T GDP currently. So we’d have to double our monetary base to fund the government this way for one year. This would cause very high inflation - we basically did fund the government 50% this way for 2 years because of COVID and look where that got us. Imagine inflation then with 100% funding in this manner over long periods.