ELI5 If money can come out of nowhere, can't it pop into somewhere?

Submitted by TheKrillers t3_z8sslw in explainlikeimfive

I want to say first that I have little knowledge of economics and politics so I have no idea what I'm talking about

During Covid, a relief plan was released and it was about $2 trillion, to me, it seemingly came outta nowhere.

The student loan debt is $1.6 trillion, that is always there.

If the government can make $2 trillion come outta nowhere, wouldn't they be able to make $1.6 trillion pop into somewhere? It seems like that 2 trillion can cancel out the 1.6 trillion.

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reviewbarn t1_iyd5ibq wrote

The money did not come out of nowhere. The 2 trillion will be paid by a combination of taxes and borrowed money. The taxes probably don't need an explanation. The borrowed money comes from government selling bonds, a promise to pay back with low interest money later in exchange for money now.

People buy the bonds because the US government is known to pay their debts, it is a safe, almost no risk investment. The government sells the bonds because if the interest rate is lower than average inflation they are lest costly than they look, and the added value from being able to spend the money NOW helps invest for the future.

Basically the government was willing to take on some extra debt to invest money that could help its citizens today.

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Lithuim t1_iyd1rvp wrote

The government can print money indefinitely, and so has the ability to basically spend whatever it wants.

The problem is that money is ultimately just numbers on pieces of paper, and if you make lots of money without making any actual stuff to buy then all you’re doing is making the existing money worth less - a process called “inflation.”

As expected, churning out $2T without any actual economic growth did cause inflation, and now all your money is worth 10odd percent less than it was is 2020.

They can also cook up $2T more to cancel debts, but you’d expect the same inflationary results.

That debt isn’t just imaginary, real people at real banks sent real money to real schools to spend on real things. It can’t just be zeroed without economic consequences.

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reviewbarn t1_iyd6exp wrote

Your first paragraph is accurate. The government can print money indefinitely with a forever balance of benefits/problems.

Your second paragraph is quasi accurate. Overprinting money is ONE way inflation can happen, but not the only one. And more importantly, it is NOT the cause of the current GLOBAL inflation, nor is it relevant to the OP's question.

He asked specifically how two programs were paid for, and neither were paid for in the manner you suggest here.

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throwawaydanc3rrr t1_iydp5i8 wrote

If the $2T in stimulus was not paid for with taxes and debt, please enlighten me, how was it paid for?

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reviewbarn t1_iydvffy wrote

What are you asking? It WAS paid for with taxes and debt. It WAS NOT paid for by printing more money as the post I responded to suggested.

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saywherefore t1_iyd39wj wrote

Yes governments can make money disappear, they do so by raising taxes and so taking money out of the economy, or by issuing bonds. These are loans to the government and so the amount that organisations give the government to buy the bonds has left the economy.

They can’t exactly do the same with student debt because it totals to zero overall. There is $1.6 trillion in debt but that is balanced by $1.6 trillion in cash that was paid to the universities etc.

If the government paid off everyone’s student debt then they would actually be adding more money into the economy; the money they would have to pay the owners of the debt (the lenders). They could in theory just cancel the debt and tell the lenders that they are shit out of luck, but that would make those lenders very angry, and would seriously destabilise any economy.

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TyrconnellFL t1_iydda8f wrote

That doesn’t make money disappear. Governments levy taxes and issue bonds to have money that they spend. They could just disappear money, but they don’t, because there’s always something to spend on.

The government could issue bonds to cover all the outstanding student debt. It’s not cancellation, it’s shifting the debt. The government could then do whatever they want with it, but it’s money they’ve spent that has to come from somewhere. Printing money to arbitrarily make it cost less is an option, but it’s one that functional governments don’t use because using inflation to make your debts not matter is a disastrous policy.

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