Governments are perpetually in debt. They are always borrowing money. They have a mental disorder that prevents them from spending less than they collect in taxes—BDD, Budget Deficit Disorder. And if it looks like they might balance the books some year, why, someone can always start a war.
Here’s an example.
Let’s say the annual budget calls for the U.S. government to spend $2.5 trillion. But the income will only be $2 trillion. They’re going to be a little short. But no worries, they have the ultimate credit card—a debt limit that they themselves control. If they borrow up to the established limit, they can just vote it higher—which they have done to the tune of a cool $11.2 trillion dollars.
The Fed loves this.
Listen as the Secretary of the Treasury calls the Chairman of the Fed.
“Ben. It’s Tim.”
“Dude. What’s happening?”
“I need a little bread. Friggin’ Taliban again.”
“No problem, Timbo. How much you looking for?”
“Five hundred big ones.”
Ben licks his lips. “Anything for you, big guy. Send me the notes and I’m down with the five hundred. Five percent work for you?”
So the Treasury prints up $500 billion dollars’ worth of IOUs—they are called Treasury bills (short term), notes (medium term) or bonds (long term)—and sends them over to the Fed with a fifth of Chivas.
In the old days, the Fed would print the cash. These days, they click a mouse.
Now here’s the part where you aren’t allowed to blink.
When the Fed prints the money or clicks the mouse, they have no money themselves. They are just creating it out of thin air. They just print it, or send it digitally. And then they charge interest on the money they lent to the Treasury. A hundred-dollar bill costs $0.04 to print. But the interest is charged on the $100. Go ahead: read it again; the words won’t change.
The interest on the national debt last year was $451,154,049,950.63. That’s $1.23 billion a day. These are the same people that are now running our banks, insurance companies and automobile manufacturers.
Sure, I oversimplified it. The Fed doesn’t own all the debt and they do some other things. But these are the basics. That is how a central bank works.